Survival of the Fittest

Pumped-up innovation efforts abroad are forcing the United States into a global battle to protect its R&D dominance

By Thomas K. Grose

photos by Jeff Macmillan, model - Mike LuftmanBlame research and development for introducing $50 panty hose to American women. Most panty hose cost around $6 and have a half-life that's measured in days (and often hours). But hosiery made by Austrian manufacturer Wolford is chic enough to be considered haute couture, yet rugged enough to last a season. Because enough women are willing to pay top dollar for Wolford's unmatched quality, it was able to pioneer-and dominate-an upper end of the market that its U.S. rivals never thought to exploit.

It's Wolford's R&D program that makes its lingerie special. The company annually spends 5 percent of its profits developing computer-driven weaving machines, and devising new blended materials and complex dyes. That may not be much money in research-intensive industries such as pharmaceuticals and computers, where a typical R&D budget is 20 percent of revenues. But in the world of fashion, Wolford's R&D investment is unique-and profitable.

Given the United States' undisputed leadership in such key industries as pharmaceuticals, automobiles, and computers, Wolford's foray into the U.S. women's hosiery market is nothing more than a marketing footnote. But the firm's success is an object lesson nonetheless: Big, wealthy U.S. industries can be caught napping by foreign competitors who know how to put R&D to good use.

There is a global battle being waged for R&D supremacy and it's one that the United States can't just win by default. In total amounts, no one spends more than the United States on R&D. But in relative terms, many smaller countries are making bigger investments in research-particularly basic research. And, over time, these small but aggressive rivals could undermine the United States' lead position. Warns the Council on Competitiveness, a U.S. business special interest group: "The United States may be living off historical assets that are not being renewed." Adds Rodney W. Nichols, president of the New York Academy of Sciences: "There is a hell of a lot more competition in the world, both in the public sector and in the private sector, in supporting R&D.

High Stakes

Is this a battle the United States can afford to lose? Not really. R&D, the lifeblood of corporate and university laboratories, is the bringer of new products and services. Countries that invest heavily in R&D over the long haul experience more economic growth and productivity-and that means a higher standard of living. According to a recent National Science Foundation report, "A nation's competitiveness is often judged by its ability to produce goods that find demand in the international marketplace while simultaneously maintaining-if not improving-the standard of living of its citizens. Science and engineering . . . enable high-wage countries like the United States to compete along with low-wage countries in today's increasingly global marketplace." In short, if the United States expects its bullish economy to continue its long and healthy run, it can't afford to be an R&D laggard.

As of fiscal 1997, U.S. government and industry together spent $220 billion on R&D, or about 2.5 percent of gross domestic product-and that's a percentage that's been rising steadily since 1993. But behind that shiny figure are other statistics that quickly dim its luster.

Total U.S. spending for R&D looks less mighty when you consider that even with the recent spike, R&D investment as a percentage of GDP is down from a high-water mark of 2.7 percent in 1985. Meanwhile, countries like South Korea, Finland, Sweden, and Denmark have been boosting their spending levels at a furious pace. To be sure, these smaller countries are building from much smaller bases, but the trend still points to U.S. complacency.

Worse, the recent overall funding increases in the United States have been driven entirely by big boosts in industry spending, while federal R&D expenditures have fallen drastically. That yawning gap is perhaps the United States' Achilles' heel, because most industrial R&D money is spent on short-term, applied research. And that's the way it should be, notes Richard Coopey, an industry and research expert at the London School of Economics. With product life spans rapidly decreasing, and new technologies entering the market at breakneck speed, industry needs to marshal its resources to bring products from development to market with as short a turnaround as possible, Coopey explains. "Traditional blue-sky research should be the provenance of government, not industry," he emphasizes.

Unfortunately, Washington does not seem to agree and has moved away from funding basic research. But the importance of open-ended, long-term basic research cannot be overstated, and depending on industry to finance it is unwise. Basic research was the wellspring for many once-radical products that are now commonplace, from PCs and microchips to TVs and VCRs. It does require patience, however, because the payoff can take years.

For example, U.S. investments in semiconductor basic research in the early 1980s did not produce big dividends for almost a decade. But with the federal government spending less on basic research and industry unable or unwilling to take up the slack, a lot of potentially breathtaking science is going unfunded. The decline in basic research in the United States is a soft spot that foreign competitors can and will exploit. Explains Debra van Opstal, vice-president of the Council on Competitiveness, "We are squeezing our frontier research, which only government funds, and this is not true in other countries."

Overseas competition is not just limited to one country or region of the world. If the United States' lead is lost, it won't be because it was grabbed by another Goliath, but because it was bloodied and bowed from wounds inflicted by scores of Davids. The benefits of research and development are not lost on many countries around the globe, and they are placing big bets on R&D in hopes of an economic payoff.

photos by Jeff Macmillan, model - Mike Luftman
Japan spent $82 billion, or about 2.8% of GDP, on R&D in 1995. Despite a recession it upped that figure to nearly $83 billion in 1996.

New Rivals Across the Pacific

Many Asian countries, in particular, seem to appreciate the need for heavy R&D investments. Nichols notes that despite the region's recent economic crisis, the commitment to R&D has been unfaltering in such countries as Japan, Singapore, Taiwan, South Korea, Indonesia, and Malaysia. "Once the financial crisis has worked its way through in a year or two, we'll see these countries as major competitors. These are countries that make R&D spending the highest priority at the highest levels of government," Nichols says.

Figures from Japan bear him out. An ongoing and deep recession this decade has not stopped Japan from funneling more money into R&D every year. In 1995, it spent $82 billion, or about 2.8 percent of GDP, and upped that figure to nearly $83 billion in 1996. As Roy Strange, an expert on Japanese industry at London's King's College, explains, "The Japanese see R&D spending as an investment rather than a cost, seed corn for the future." And with Japan under pressure from its Asian neighbors, who can do things more cheaply, "it feels innovation is its only recourse. To stay ahead they need to develop new products, and to do that they need to spend on R&D. They have no option," Strange says. Still, Japan's impressive rate of R&D investment is, like the United States', somewhat endangered by an over-reliance on industry. Three-quarters of R&D funds in Japan come from the private sector.

Also on the horizon are new threats from such burgeoning Asian economies as China and India. Van Opstal says that despite some early successes, China and India have yet to realize their enormous potential. Neither nation, she says, could really be termed innovative. "They're still mainly copiers," adept at using technology discovered elsewhere to develop products, van Opstal explains. But each country is pouring money into R&D and they aren't likely to remain copiers for long.

photos by Jeff Macmillan, model - Mike Luftman 

 

The British government hopes to boost R&D spending levels by 14% over the next three years.

Old Competitors Across the Atlantic

Though the threat from Asia looms largest, Europe cannot be discounted as a weak rival. Nichols says that while Europe may not be a rising star, it is a source of consistent competition. Denmark, for instance, increased R&D spending by 63 percent between 1992 and 1998. Says Jakob Hansen, a section head at the Ministry of Research in Copenhagen, "We hope to attain a knowledge-based economy" that is stronger and offers more and better-paid jobs. "We feel we can compete in a global economy," he adds. And European business leaders expect that the recent creation of a single market and a single currency-the euro-in Europe will lead to greater R&D spending among Continental businesses. Many European manufacturers whose sales were previously confined to domestic markets will soon be expanding across borders. Peter Cotgrieve, head of the Save British Science Society, explains, "The better economics and larger markets make it more profitable for them to spend more on R&D."

But some European countries, particularly Britain, the Netherlands, and Norway, are, like the United States, dogged by anemic R&D spending levels. Concerns over falling R&D expenditures, as a percentage of GDP, have led Britain's two-year-old Labor government to promise to boost spending levels by 14 percent over the next three years. "We're hearing really positive stuff," Cotgrieve says, adding that industrial R&D spending in Britain should increase once the government spends more. Britain and much of Europe have long been hampered by a lack of entrepreneurial spirit, and that's been a barrier toward getting academics to work in tandem with industry. "Profit was seen as a dirty word," Cotgrieve says. But that attitude is changing, he adds.

Domestic Obstacles

So why, when surrounded by ready and eager competitors, has the U.S. government cut back on funding basic research? Blame it on the end of the Cold War and the subsequent decline in defense spending. "Defense really pushed the envelope, especially in computer and electrical engineering research," van Opstal explains, adding, "I'm glad the Cold War is over, but these cuts really hurt." Nichols, of the New York Academy of Sciences, adds that DoD was supporting nearly 50 percent of electrical engineering, computer science, and math research, "and no other agency is making up for that reduction." It's also clear that Congress' research priorities have changed. While there has been plenty of money available for the life sciences, money for engineering, math, and the physical sciences has not been up to par, he adds.

The falloff in U.S. R&D spending is not the only reason U.S. industrial supremacy faces serious challenges. U.S. regulations and tax laws don't encourage industrial R&D spending, either-especially compared with other countries. Karl-Michael Millauer, Wolford's chief financial officer, notes that the Austrian government offers industry an 18 percent tax credit for R&D spending. Meanwhile, moans van Opstal, the United States "has the worst tax credits [for R&D] in the world." Moreover, federal policies are often in conflict with one another, leading to R&D gridlock. For instance, though the government encourages corporations to pool resources and knowledge, if they do, they run the risk of a Justice Department anti-trust probe. These hurdles are a big reason why some companies have moved their R&D efforts offshore, van Opstal says.

photos by Jeff Macmillan, model - Mike Luftman
Among 14 industrialized countries, the U.S. is one of only four whose R&D expenditures, as a percentage of GDP, have fallen since 1985.

Back on Track?

So is anyone in Washington listening? Perhaps. The proposed White House budget for FY 2000 would increase R&D spending within the NSF budget by 7 percent, within the Department of Energy's science budget by 5 percent, and within the National Aeronautics and Space Administration's budget by 4 percent. It would also create a new $366 million R&D program called Information Technology for the 21st Century. And Senators Bill Frist (R-TN) and John Rockefeller (D-WV) have reintroduced their bill to double federal spending on non-defense research over the next 11 years.

Frist and Rockefeller are also behind the Forum on Technology and Innovation, which has so far been underwritten by the Kellogg Foundation. The recently launched Forum's aim is to educate Congressional staffers on key science and technology issues. It's hoped that if staffers better understand science's role in U.S. economic health, it will help loosen Congressional purse strings.

"I think the message is getting through, if ever so slowly," van Opstal says. What's worrying, however, is that the siren song of R&D's promise has clearly been heard in so many other countries, as well.

Thomas K. Grose is a freelance writer in London

 

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