Political arguments generally boil down to differences regarding the role of government in society and the marketplace. Few would argue against the government’s role in areas where the market fails to provide for the public good. An obvious example of this is the military and other government activity surrounding our national security.
A not-so-obvious example to policy makers and the general public – and one that is often unfairly tagged as “corporate welfare” – is federal funding for basic research and development. Throughout the roaring economy of the 1990s, federal funding for research in the physical sciences, mathematics and engineering has shamefully trailed off. Since 1985, federal research as a percentage of gross domestic product, has declined in these areas by 29%, 21% and 15%, respectively. The one area that has seen a gain – life sciences – has increased only by a paltry 7%.
For the long-term health of our country, this is an untenable situation. Simply put, the U.S. cannot hope to maintain its position as the world’s leading technological innovator and economic power if it does not increase its investment in basic R&D. The reasons for expanded federal support in this area are myriad.
As with the military, support for federal R&D addresses a market failure and provides for the public good. The biotech industry, for instance, simply would not exist if it were not for federal funding of the National Institutes of Health. Industry does not have the resources to support the type of R&D done at NIH in addition to its own research. Nor would it be able to recoup those costs through the marketplace if it were able to take on that enormous responsibility. As it is, biotech concerns require millions in funding and years of effort just to take biotechnology from the basic research stage to the marketplace.
The public in general and policy makers in particular need to view federal support for R&D not only as critical to maintaining our technological and economic leadership but also as an investment that pays significant returns to the government (via tax revenue) and society. As Lester Thurow, the noted economist at the Massachusetts Institute of Technology, forcefully stated, “Rates of return on R&D spending are far above those found elsewhere in the economy. Government now pays for about 30% of total R&D, but with a 66% rate of return it should be much more. Put simply, the payoff from social investment in basic research is as clear as anything is ever going to be in economics.” If the federal government does not step up to the plate and adequately fund basic R&D, these impressive returns cannot be realized.
Yet another compelling reason for an increase in federal support of basic R&D is its connection to scientific and engineering research and degree production at our universities. As research funding in mathematics, physical sciences and engineering has declined as a share of GDP, so too have the number of students earning bachelor’s degree in these fields. Between 1986 and 1996, the number of bachelor’s degrees awarded in physical sciences declined 13%; in mathematics, degrees were down 19%; and in engineering, down 21%. These numbers were generated at a time when the total number of bachelor’s degrees increased by 18%. It is not difficult to understand why degree production in the technical fields has fallen off: with tighter R&D budgets at our universities, there inevitably are fewer research projects, fewer fellowships, and fewer and more harried faculty – all of which leads to less opportunity for and less interest by students.
This distressing reality has greatly contributed to the dire labor shortage that our high-tech and biotech industries currently suffer. In recent years this shortage has been filled partially by skilled foreign workers. Industry was successful last year in securing passage of legislation to boost for the second time in the last few years the number of H-1B visas available to hire these workers. These additional workers fill many – but not nearly all – of the vacant slots. No one is under the illusion that a periodic boost to the H-1B visa cap is a long-term solution. Obviously, better education and training for Americans is the answer. And a first step to do this is to boost federal support for basic R&D.
While private sector R&D has grown rapidly in recent years – now outpacing federal R&D by two-to-one – the demands of the marketplace continue to push this investment closer to product and process development. As a result, the need for federal support of basic R&D continues to grow in real and relative numbers. Legislation supported by the National Venture Capital Association was introduced in Congress last year to significantly boost R&D funding in these areas, but the clock ran out before final action could be taken. Since basic R&D is the foundation on which we build everything, we must let policy makers know that this is a priority. Without it, there will be no future.
Steve Lazarus is Managing Partner of ARCH Venture Partners in Chicago. He is also a member of the NVCA Board of Directors and is Chairman of the Board’s Research Committee.