Goal: Increase support for the research and development activities that provide a foundation for high-tech growth
Research and development (R&D) is the wellspring of innovation and consists of basic research, applied research, and development. Measures of R&D activity include both inputs, such as money spent on research and development, and outputs, such as patent activity. Most R&D expenditures originate from industry and private investment, primarily for the purpose of applied research and development with more immediate product commercialization possibilities. Federal and state governments also invest substantial amounts in R&D, often in basic research, which results in significant discoveries that are so diffuse that they are difficult for any one business to capture, yet importantly feed into applied research. Virginia’s universities, hospitals, and laboratories are important players in the discovery and dissemination of new ideas. Although some R&D measures rely on data that is a few years old, they may be included in the IEMS. The Research & Development category is central to the IEMS, as it represents the idea-generation phase that results from combining intellectual with financial capital to develop technologies that have potential for commercialization.
The value of overall R&D performed in Virginia declined in 2015 from the prior year, the most recent year of data available for this measure. Corporate R&D, a component of that, declined as well in 2015. Federal R&D obligations also form an important part of Virginia’s overall R&D expenditures. Federal R&D obligations have decreased in four of the last five years. The total number of combined Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) awards have dropped in recent years, although dollar amounts have fluctuated.
Colleges and universities also perform a significant amount of science and engineering R&D. These expenditures increased in 2016. Patents awarded to residents of Virginia decreased in 2015 after four years of increases, and Virginia continues to lag behind the national average and benchmark states on a population-adjusted basis. Intellectual property created through trade secrets and copyrights are also important for Virginia.
Why is Research & Development important?
R&D investment is a key input in the innovative process. It is necessary but not sufficient for innovation-driven growth. Not all R&D investments will result in an innovation output such as a commercially successful product or service; however, R&D expenditures provide an indication of the state’s overall investment climate and capacity to create and disseminate knowledge. Likewise, although not all patents awarded to residents of Virginia will be licensed or utilized in products or services, they are intellectual property that businesses and individuals believe have commercial value.
How has Virginia performed over the last five years?
State R&D Intensity
Research and development is a key input to the innovation process. State R&D intensity measures spending attributable to federal and state government, businesses, higher education institutions, non-profit organizations, and other entities as a percentage of state gross domestic product (GDP). Although this data is available only through 2015, it can be used in combination with more recent federal and corporate research expenditures to ascertain likely trends in overall research and development activity and to determine the Commonwealth’s relative position with respect to other states.
Virginia ranked 22nd on R&D expenditures as a percentage of state GDP in 2015, at 2.1% of state GDP, below the U.S. average of 2.8%. This percentage is lower than 2011’s 2.6%. New Mexico led the nation with 6.5% in 2015, largely because of the Los Alamos and Sandia national laboratories located there. Among benchmark states, R&D spending was higher in Massachusetts (5.9%), Maryland (5.6%), California (5.0%), and North Carolina (2.4%).
The federal government invested $136 billion in R&D in 2011, approximately 32% of all national R&D spending. However, these obligations have decreased in recent years as a result of the expiration of fiscal stimulus programs and budget sequestration. Federal investment plays a large role in Virginia. Federal research obligations were $7.5 billion in 2015, which is 1.6% of state GDP. This percentage is well above the national average of 0.6% and ranked the Commonwealth fourth among U.S. states. This amount was down from $7.7 billion in 2014. Maryland ranked first with federal R&D obligations of 4.6% as a percentage of GDP in 2015. All other benchmark states were lower.
Corporate R&D measures research and development activities conducted by private businesses. Private businesses accounted for 69% of total R&D activity performed at the national level in 2015.
Virginia corporate R&D expenses declined from $5.56 billion in 2011 to $4.45 billion in 2013. Outlays rebounded in 2014 to $5.0 billion but decreased again to $4.49 billion by 2015.
Corporate R&D intensity as measured by expenditures as a percentage of private industry output is lower in Virginia than the nation. Expenditures represented 1.1% of private industry output in 2015, ranking Virginia 28th in the nation and below the 2.3% national average. All benchmark states were higher. The state of California led the nation with 4.9%.
SBIR and STTR Awards
The Small Business Innovation Research (SBIR) program offers competitive research grants to small businesses to conduct R&D that has a high potential for commercialization. A related program, the Small Business Technology Transfer (STTR) program, offers similar incentives for small businesses that partner with non-profit U.S. research institutions. The SBIR/STTR programs offer grants for two phases: Phase I offers seed funds to determine the scientific, technical, and commercial merit and feasibility, while Phase II follow-on funding is awarded to support prototyping and demonstration of the most promising Phase I projects.
Virginia businesses were awarded a total of $131.27 million in SBIR/STTR funds in 2016. This amount is higher than the 2015 total of $113.4 million. SBIR funding increased while STTR funding declined from previous year levels. The total number of combined SBIR/STTR awards decreased for the fourth year in a row.
Virginia firms received the third highest amount of SBIR/STTR funds among U.S. states. Only benchmark states California ($443.9 million) and Massachusetts ($239.1 million) were higher. Adjusting for state size, Virginia firms received $15.6 in SBIR/STTR awards per capita in 2016. This was substantially above the U.S. average of $6.4 in 2016, and ranked fifth highest among all states. The leading state was benchmark state Massachusetts at $39.3 per capita. Only one other benchmark state, Maryland, ranked higher with $20.4 per capita in SBIR/STTR awards.
Academic Science and Engineering R&D Expenditures
University R&D activities are an important source of basic and applied research discoveries and provide technologies for commercialization. Virginia higher education science and engineering R&D expenditures increased from $1.3 billion in 2015 to $1.4 billion in 2016. In recent decades, academia in Virginia has relied on the federal government for more than half of its R&D funding. However, over the 2012 to 2016 period, an increasing percentage of funding has originated from other sources, principally the higher education institutions themselves. During this period federal funding decreased by 5.5%, and state and local government-financed R&D decreased by 38.5%. In contrast, institutional funding increased by 3.5%, and business-financed R&D rose by 44.4%. Other funding sources (including non-profit organizations) increased by 34.8%.
Like many other states, Virginia’s academic science and engineering R&D expenditures decreased as a percentage of state GDP from 2012 to 2016., dropping from .29% to .27% of GDP. Moreover, the 2016 percentage is lower than the U.S. average of .37% and ranked 37th among U.S. states. It also ranked lower than all six benchmark states. Maryland was the nation’s leader at 0.99%.
Virginia’s rate of patent formation steadily improved from 2011 to 2014 before experiencing a dip in 2015. The total number of patents awarded in Virginia was 2,057 in 2015, a significant increase from 1,600 in 2011. Adjusting for population, Virginia received 24.5 patents per 100,000 residents in 2015, which was significantly lower than the U.S. average of 43.8 per 100,000 residents and ranked 29th among U.S. states. It was also lower than all benchmark states. California led the nation with 102.7 patents per 100,000 residents. Patents are one element of intellectual property (IP); IP created through trade secrets and copyrights is also an important economic driver for Virginia.
Patent rates vary widely within Virginia. The Northern region had the highest patent rate at 43.4 patents per 100,000 residents in 2015. The West Central region also was higher than the state average with 30.8 patents per 100,000 residents.
What are the implications?
Research and development inputs and outputs are some of the most tangible and traditional innovation measures. Virginia firms and institutions do well in attracting federal government R&D investment, but with the onset of budget sequestration, this funding became more tenuous. Overall R&D performed in Virginia declined in 2015, indicating that other sources of R&D investment such as private firms had not filled this void. Academic science and engineering R&D expenditures have stabilized, but this is mainly due to institutions assuming a greater burden of self-funding these activities. Virginia performance remains mixed on the limited output measures available. The number of patents awarded decreased in 2015, and it continues to lag behind benchmark states and the national average. Overall, Virginia’s performance on these measures deteriorated in recent years, although it can be difficult to ascertain the most current situation because some metrics are reported with substantial time gaps. Also, relative to the benchmark states and the U.S., Virginia lagged in areas of R&D intensity and outputs, with the exception of federal government support represented by R&D obligations.
Data Sources and Definitions:
Each IEMS indicator reports data available as of June 22, 2018 and provides a description of trends for five years of historical data when available.
State R&D Intensity: State R&D intensity measures R&D funded or conducted by federal and state agencies, businesses, higher education institutions, and non-profit organizations as a percentage of state gross domestic product (GDP). Data from the National Science Foundation, Science and Engineering Indicators 2016 State Data Tool, Table 40: http://www.nsf.gov/statistics/2016/nsb20161/#/singleind/39/T. Data are in current dollars. Available every two years in January.
Federal R&D Obligations: The National Science Foundation defines federal obligations as “the amounts for R&D orders placed, contracts awarded, services received, and similar transactions during a given period, regardless of when the funds were appropriated and when future payment of money is required” by federal government agencies and organizations. The R&D could be performed by private businesses, non-profit organizations, higher education institutions, or other entities. Data obtained from the National Science Foundation (NSF) Survey of Federal Funds for R&D, WEBCASPAR (Integrated Science and Engineering Resources Data System): https://ncsesdata.nsf.gov/webcaspar/. Data are in current dollars. Available every year in May.
Corporate R&D Expenses and Intensity: Corporate R&D expenses measure R&D performed by businesses in the state, including expenses reimbursed by the federal government and non-federal sources such as state governments, private foundations, and other businesses. Corporate R&D intensity measures corporate R&D expenses by state as a percentage of state private industry output. Data from the National Science Foundation, Science and Engineering Indicators 20168 State Data Tool, Table S8-453:
Data are in current dollars. Available every two years in January.
SBIR and STTR Awards: Data obtained for the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs is from the U.S. Small Business Administration: https://www.sbir.gov/sbirsearch/award/all. Available every year in April.
Academic Science and Engineering R&D: Data obtained from the National Science Foundation (NSF) Survey of Academic R&D Expenditures. WEBCASPAR (Integrated Science and Engineering Resources Data System): https://ncsesdata.nsf.gov/webcaspar/.Data are in current dollars. Available every year in January.
Patents Awarded: Data obtained from the United States Patent and Trademark Office (USPTO), Patent counts are based on utility patents and are assigned to geographical units based on the residence of the first-named inventor. Patent counts by state: http://www.uspto.gov/web/offices/ac/ido/oeip/taf/cst_utl.htm and by county: http://www.uspto.gov/web/offices/ac/ido/oeip/taf/countyall/usa_county_gd.htm. State data available every year in March. Regional data available every year in December.