How Much Research are US Companies Really Doing?
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In recent years, there has been increasing concern over the decline in private sector spending on scientific and technological research in the US. While the total US R&D figures still look impressive when compared with the rest of the world, a closer look at the data reveals that “true” research, specifically that which is performed within the United States is smaller than is generally believed. To understand true research and development in the nation, STPI closely examined data from the Internal Revenue Service, in particular data on what are called Qualified Research Expenses (QREs) – which are reported by companies applying to the government for the research and experimentation (R&E) tax credit . This is an excellent source for understanding firm investmest in R&D, as the R&E tax credit is stringent in requiring that research activities claimed for tax purposes include “research in the laboratory or for experimental purposes, undertaken for discovering information which is technological in nature…” In this computation, product and process development-related activities (activities included in R&D) are disqualified. The R&E tax credit also disqualifies all research activities conducted outside the US. Thus, qualified research expenses (QRE) claimed by businesses applying for the credit give us a unique window into the state of scientific and technological research and experimentation in the private sector within the US. In this paper, we compare the R&E spending of the various industrial sectors to their R&D budgets. While the conventional wisdom is that research spending is about 62-65% of R&D spending, we found that in most sectors it is less than 50%. We also look at the distribution of the R&E tax credit amount across small, medium and large companies to analyze if the credit is especially helping small and medium size companies. We begin with some background on what are considered qualified research expenses.