Corporate Management of R&D—Lessons for the U.S. Government

Although the contribution of R&D investment to the world economy is supported in anecdotal and historical studies, the quantitative, scientific base for these convictions is weak (1). Even firm-level assessments of the impact of R&D on productivity lack quantitative specificity (2). Although patents provide an abundant reservoir of data, experience suggests that the number of patents is a better measure of R&D input (R&D expenditure) than R&D output (sales, market share, etc.) (3). Because of this weak quantitative framework, many corporations are addressing such questions as: * Should technology be developed through in-house R&D or should it be conducted collaboratively or even purchased? * How is R&D best conducted? * How much R&D is enough? * How can R&D be made more cost-effective? * How can the productivity of R&D be measured and improved? In order to develop federal technology policies that provide maximum return to civilian technology, it is appropriate to examine industry's response to these questions to determine whether new directions are suggested for federally funded R&D. Two primary options are suggested to government, depending on how one interprets these industrial trends. One option is based on the assumption that because of competitive market pressures, industry is empirically learning how to optimize R&D and make it more efficient, and therefore government should imitate these industry practices. A second option is based on the assumption that industrial streamlining of R&D is creating serious deficiencies in the evolution of knowledge, and therefore government should step in to fill these deficiencies. This article is intended to stimulate meaningful debate that will hopefully lead to a synthesis of improved federal policies which, in turn, will promote higher commercial return from federal R&D. R&D Investment Under Scrutiny The cost-effectiveness of R&D is being challenged in many U.S. corporations. Many of the U.S. firms that have failed to compete in high-tech industries are firms that possessed superior technological capabilities, and some companies are becoming disenchanted with their R&D organizations because of their inability to be of value to the company. IBM and Apple's competitive difficulties were not due to under-investment in R&D nor to lack of quality in their R&D. Companies like Microsoft, Oracle, Sybase, Novell, Electronic Data Systems, Andersen Consulting, Dell, and AST Research have achieved strength in the marketplace without unusual investments in R&D nor the reputation for unusual excellence in R&D (4). For the overwhelming majority of information technology companies today, market success bears little relationship to the size of their R&D expenditure. Many of these companies have capitalized on innovative R&D conducted outside of their laboratories, including innovations in such areas as spread sheets, which were made at national laboratories (5). Researchers at the international Organization for Economic Cooperation and Development have concluded that the rate of major innovations has been declining for more than a decade, while the average cost of innovation has experienced a spectacular increase. Some analysts conclude that the point has already been reached where the marginal cost of R&D exceeds its marginal return (6). Although some companies have reduced their investment in R&D, the 900 largest U.S. corporations increased their annual investment in R&D by 1.9 percent in 1993. The increase would have been 4 percent had it not been for IBM, the second largest U.S. investor in R&D in 1992, reducing R&D spending by 13 percent. Overall, U.S. companies spent $83 billion on R&D in 1993, an increase of 4.2 percent over 1992 spending. In comparison, between 1992 and 1993 Japanese companies reduced R&D spending by 1 percent and German companies increased R&D spending by 1. …