Frequently Asked Questions About US Government Funding for R&D
How much? On what? What's the ROI? Etc.
This article will be updated as the state of the academic literature evolves; you can read the latest version here.
Table of Contents
How much does the US federal government spend on R&D?
What kind of R&D does the government fund?
What’s a reasonable guess at the average return on investment (ROI) of R&D?
Has the average ROI of R&D spending changed over time?
What’s a reasonable guess at the marginal, rather than average, ROI of government R&D?
Is government support for R&D self-financing?
Can private sector research substitute for government research?
If R&D is so good, why isn’t our government already doing even more of it?
If R&D is so good, why does science have so many well publicized problems?
What’s your preferred policy?
To make this document more skimmable, after each question I’ve written a very short high level response in a quote block (aiming for the length of a tweet). A more detailed response is given below each quote block.
If you have additional questions you would like to see answered, please email me!
How much does the US Federal Government spend on R&D?
The US government spent ~$160bn on R&D in 2022, about 2.6% of government spending. As a share of GDP or federal spending, federal support for R&D has declined for decades. We spend more on R&D in absolute terms than other big R&D producing countries, but are middling as a share of GDP. The private sector currently spends about 4x as much.
More details:
In 2022, the federal government spent about $160bn on R&D. This is about 0.6% of GDP. For comparison, the private sector spent about $673bn on R&D in that year, which is about 2.6% of GDP. In inflation-adjusted terms (pictured below), federal R&D spending has risen substantially since 1953.
To put this into context, it’s useful to consider it relative to three other benchmarks that have also increased over this period. In the following figure, I look at government support for R&D relative to private sector R&D spending, total government expenditures, and GDP. As the figure makes clear, while government support for R&D has grown in inflation-adjusted terms, that growth has failed to keep pace with the growth of these other benchmarks.
Federal support for R&D was extremely elevated during the space race - in 1964, we were spending more than $2 on R&D for every $1 of private sector R&D and for every $20 of federal spending - but this fell rapidly. By 1990, the Cold War was over and the federal government was spending about $0.75 on R&D for every $1 of private sector R&D, about $0.95 out of every $20 of government spending, and about $1.03 out of every $100 of GDP. By 2022, this has declined even further, to $0.24 for every $1 in private sector spending, $0.52 out of every $20 in federal spending, and $0.61 out of every $100 in GDP.
We can also compare the US to other countries for more context. The US government leads the world in the absolute level of R&D it supports. The following figure gives government spending totals for the 8 countries or regions that account for the largest share of global R&D spending in 2021 (amounts adjusted for purchasing power parity).
However, as a share of GDP, the US is more middling among major R&D performers.
In 2021, the Federal spending on R&D was about 0.7% of GDP. In contrast, the South Korean government spent slightly more than 1.1% of GDP on R&D, which are levels the US has not been at since the late 1980s. The German government also spent a significantly larger share on R&D, at over 0.9% of GDP.
What kind of R&D does the government fund?
About 75% of R&D spending is split roughly evenly between the Department of Defense and Department of Health and Human Services (mostly NIH). About 75% of the rest is split between the Department of Energy, NASA, and the National Science Foundation.
More details:
In 2022 (see table RD-12), about half of R&D was devoted to experimental development (the majority at the Department of Defense), and the other half to basic and applied research. Focusing on the research side (see table SRD-7), about 45% of research funding was spent on the life sciences, the majority at the National Institutes of Health. The rest is largely split up between the Department of Energy, Department of Defense, NASA, and the National Science Foundation. The biggest fields of study, after life science, are engineering and the physical sciences.
What’s a reasonable guess at the average return on investment (ROI) of R&D?
Averaged across government, the private sector, and other non-profits, the ROI is probably about $5.50 for every dollar of R&D, if you focus only on GDP. If you put a dollar value on other benefits of R&D, I think $11 for every dollar is reasonable.
More details:
While it is very challenging to estimate the benefits from a specific R&D program (although many have tried, as I will discuss), it is actually relatively straightforward to estimate the average ROI of research in general. The fundamental argument is a pretty simple one. If we believe that economic growth is derived from technological progress and technological progress is derived from spending on R&D and investment costs associated with building new technologies, then we can compute the average return on investment of R&D by dividing the value of growth by the cost of R&D and investment. You have to do some standard accounting adjustments to account for the fact that costs and benefits occur over different points in time, but Summers and Jones (2021) walks through how to do this calculation.1 If you assume a constant share of GDP devoted to R&D and investment generates constant exponential growth, which has been very roughly true for decades, then Jones and Summers (2021) shows the average benefits-to-costs ratio is given by this formula:
Benefits-cost-ratio = g / (s * r)
Where g is per capita economic growth, s is the share of GDP spent on generating technological progress, and r is the interest rate.
We will focus on the USA. In that case, g has averaged 1.8% since the 1950s and a pretty standard value for the interest rate r in economics is 5%. To estimate s, let’s add together the share of GDP devoted to R&D, which has averaged 2.5%, and the share of GDP devoted to embodying new ideas in technology. Since the embodiment of growth enhancing ideas into technologies is overwhelmingly performed by the private sector, Jones and Summers suggest that net private sector investment is a reasonable proxy for this value. That has averaged 4.0% of GDP since the 1950s. Adding together R&D and private net investment, we get 6.5% as the share of GDP devoted to realizing technological progress.2
Taken together, we have 1.8% / (6.5% * 5%) = $5.50.
However, this formula only captures benefits that are reflected in GDP per capita. Nordhaus (2005) argues health gains range from 59%-126% of the value of income gains over the 20th century. I think we should err on the upper end of this range, because health is not the only benefit of technology not captured by GDP.3 Accordingly, I think it’s reasonable to assume the total benefits of technological progress are double the purely monetary value and average out to about $11 per $1 spent.
Has the average ROI of R&D spending changed over time?
There is some suggestive evidence that the ROI of all R&D has declined since the early 2000s, though it still remains the case that a dollar of R&D probably generates several dollars worth of economic growth benefits. It seems probable this will reverse as a consequence of maturing AI, but it’s hard to say how much.
More details:
We can use the previously discussed Jones and Summers (2021) formula to see if the ROI of R&D has changed; this will be only suggestive though, because there are various lags between when R&D is performed and when growth is affected. In the figure below, I compute the benefit cost ratio using their formula, but instead of using the long-run average value for g (the per capita growth rate) and s (the share of GDP invested in technological progress), I use the average over only the preceding 15 years. This lets us see if the ROI of R&D has changed.
It has; most notably, it has declined noticeably since the early 2000s.
There has been a decline in the average ROI of R&D from a peak of nearly $8 in 1998 to roughly $4.25 in the most recent year (or $8.50 if we count non-monetary benefits). Mechanically, this decline is driven by the growth rate of GDP per capita falling, rather than an increase in spending on technological progress. Indeed, the latter has also been declining, as net private sector investment falls, but the rate of GDP per capita growth decline has been more rapid over this period.
(Note that despite the recent decline, the data here remains consistent with every dollar spent on R&D generating substantial net benefits.)
Looking to the future, it seems likely to me the declining ROI of R&D will reverse as AI technology continues to mature and diffuse. It’s difficult to say how much though. Assuming we do invent AI that can perform most of the cognitive work of R&D reliably, we can turn to economic theory about what happens when some parts of the innovation process become automated. These theories generally tell us that when some tasks are automated the long-run impact depends on other potential bottlenecks. For the application of AI on innovation, we may be bottlenecked on the supply of data, the pace of iterative real-world testing, and the diffusion of new technologies, to take three examples.4 But we’re in a bit of uncharted territory here, and it’s hard to know how significant these bottlenecks will turn out to be.
What’s a reasonable guess at the marginal, rather than average, ROI of government R&D?
This is very challenging to estimate, but a variety of research points to an additional dollar of government sponsored R&D generating $2-$5 in benefits via economic growth.
More details:
If you’re unfamiliar with the term, the ROI of the marginal dollar is the ROI of the last dollar spent. It’s harder to estimate, but more informative about the impacts of an increase or decrease of R&D spending. In general, we would expect the marginal ROI of R&D to be lower than the average, since we probably fund the most promising R&D first and the least promising R&D last. Assuming we have at least some ability to differentiate promising and unpromising research, increased spending will have a lower ROI than average, since the additional funding will be spent on less promising projects.
Meanwhile, government R&D might be different than the average for all R&D if, for example, the government on average selects better or worse R&D projects, or if increases in government funding crowd out or crowd in private sector R&D.
We have a few different papers that look at the impact of marginal government R&D funding for specific programs. Azoulay et al. (2019) focuses on NIH research, estimating that $1 in additional research funding from the NIH (on the margin) is associated with roughly $2 to $3 in additional pharmaceutical sales for newly discovered drugs. This is an underestimate of the total value created, since it is restricted to the pharma sector, for drugs that get patented (not all do).
Some other papers (discussed in this post) investigate programs like the SBIR program (which largely funds R&D by small firms). These studies compare firms that barely win one of these grants to ones that barely lose, again zeroing in on the impact of government R&D support for marginal firms. One of those papers5 estimated that a €1.6mn grant generally yielded €2mn in value to the winning firm after a few years, using a conservative valuation of the resulting patents. But that is only the value to the firm receiving the grant, and another paper about these programs6 found spillovers to other firms increased this value by 2-4x. That implies the marginal SBIR grant generates $2.50 to $5 for every dollar.
A different approach to this question is to compare the impacts of marginal versus average returns to R&D. Park, Lee, and Kim (2015) also looks at NIH research funding, comparing the publication outcomes of research funded under its normal budget to research funded by an unexpected budget increase (which was part of the stimulus to combat the 2008 financial crisis). Depending on how you measure outcomes, the marginal research (which was funded by the budget increase) had between 7% and 43% worse outcomes than normally funded research. Applying that to my estimate that the average returns to R&D are roughly $5.50 for every dollar in spending implies we should get $3.14 to $5.12 in benefits for a dollar of additional R&D spending.
Finally, both Dyèvre (2024) and Fieldhouse and Mertens (2024)7 both look at the overall productivity effects of US government R&D over the last 70 years. Both of these are primarily based on the effects of marginal changes to R&D; when agencies increase or decrease their R&D budgets. Those effects are quite large and consistent in magnitude with the average estimates implied by Jones and Summers (2021).
Now; this kind of empirical work is really tricky and the above results should be taken with some humility. However, taken together, we have a few program specific studies consistent with a marginal ROI of government R&D spanning $2 to $5.12, against an overall average for all R&D of roughly $5.50, as implied by the Summers and Jones (2021) calculations. This is consistent with the marginal ROI of government research being 36-93% of the average ROI of all R&D.
(Note again that none of these estimates put a dollar value on the benefits of innovation not captured by GDP; my preference is to double these estimates to account for these other benefits of technology, but reasonable people can disagree.)
Is government support for R&D self-financing?
Possibly. Some studies indicate government sponsored research generates enough future taxes, via its impact on growing the economy, to entirely pay for itself. But other studies suggest otherwise. Further study is probably a good idea.
More details:
If government support for R&D has a sufficiently large impact on economic growth, then it is possible that R&D spending may eventually increase the tax base enough to pay for its own costs. I don’t think our evidence on this is strong enough for me to insist this is the case; but I think it quite possibly true and worth further study (see Gullo et al. 2025 for a much more thorough discussion of related issues).
To get the ball rolling though, consider an argument for and against this possibility.
The case against is relatively straightforward. In the last question, I pointed to a variety of studies that indicated the marginal dollar of R&D generated $2-$5.12 in economic benefits. Given US taxes have averaged roughly 17% of GDP, these would indicate $1 of R&D generates about $0.34-$0.87 in future tax revenue, which is insufficient to finance itself.
The case in favor comes from Dyèvre (2023) and Fieldhouse and Mertens (2024), the most comprehensive studies of US government funding for R&D. To start, observe that Dyèvre (2024) finds that a 1% increase in government R&D spending is associated with a 0.025% increase in productivity after 5 years. In 2022, a 1% increase in government R&D spending is about $2bn. We can use this tool by the Congressional Budget Office to estimate the ten-year budget impact of a 0.025% increase in the productivity growth rate that takes place in the fifth year of a ten year budget. The tool implies this additional $2bn in R&D spending would reduce the deficit (over ten years) by $7bn! And when Fieldhouse and Mertens (2024) model the long-run impact of R&D, they too note “[these] estimates also suggest that government funding of nondefense R&D is self-financing from the perspective of the federal budget, at least in the long run.”
Can private sector research substitute for government research?
The private sector probably leaves some R&D avenues under-explored, given the extent to which R&D benefits other firms. This is supported by data on the differences between private and publicly supported research, and by the growth impacts of government funded R&D.
More details:
Even as government funding for R&D has declined as a share of GDP, private sector funding has increased by a more than offsetting amount, such that total R&D as a share of GDP has increased. This is good; I think government funded R&D is most valuable in an environment where the private sector is also doing extensive R&D.
Even so, R&D is characterized by a free-rider problem. New knowledge tends to have wide application, and it tends to be hard to prevent people from using those ideas. The existence of these “knowledge spillovers” is a classic reason why there may be underinvestment in R&D. When the private sector decides how much R&D to do, it weighs the costs it bears against the benefits it expects to receive - not the benefits all firms expect to receive. But this argument also implies the federal government is uniquely positioned to benefit from funding R&D, since it can capture these spillovers via the tax system. When a firm invests in R&D, a big chunk (possibly the majority) of the benefits flow to other US firms. A private investor doesn’t see any upside from that, but a government investor does.8
The size of these knowledge spillovers appear to be substantial (see my post Knowledge Spillovers are a Big Deal for an overview of some evidence on its scale), and tools that firms use to try and mitigate them (like patents) don’t work that well, especially for some kinds of R&D. As a consequence the private sector doesn’t invest in a lot of research that would be valuable to society, but for which they can’t capture enough of the benefits to make it profitable.
You can see this in a few places in the data.
First, the government has tended to specialize in research that has more spillovers than the private sector, suggesting those kinds of research are affected most adversely by these issues. To take one example, about one third of government R&D is characterized as “basic” research (rather than applied research or development), but only 7% of private sector research is (see Table RD-3). Basic research is associated with scientific research, and a variety of papers have found this kind of research is particularly valuable for innovation.9
Second, more specific to government funded research, Dyèvre (2023) also looks at the patents held by government agencies and finds they differ from the typical private sector patent in a variety of ways. For example, they’re more likely to be cited by a wide range of patent technology classes, more likely to cite the scientific literature, and more likely to anticipate new categories of technology.
Third, as we’ve seen, studies that look at the impact of increases in government spending on national productivity tend to find it has large positive effects. That’s consistent with there being a lot of valuable lines of research out there that were not being adequately explored prior to the government expansion.
If R&D is so good, why isn’t our government already doing even more of it?
My guess: even though R&D has a high ROI on average, it’s hard to make the case for any specific program. Even expert peer reviewers often disagree on what is good research, and tangible benefits arrive after a long delay and are often too diffuse to easily pin back to any particular R&D program.
More details:
The same factors that make it difficult to estimate the ROI of R&D make it difficult for people to attribute tangible benefits arising from an R&D program to a specific program. First, evaluating the quality of research is very challenging, even for domain experts. The post What Does Peer Review Know? reviews a variety of studies that document the relationship between expert peer review scores and subsequent impact is very noisy (though it is positive).
Eventually, R&D may yield unambiguous benefits in the form of new technologies that give us new capabilities, but by this point it can be hard to attribute these back to underlying R&D. Partially this is due to the extent of R&D spillovers and partially due to the long lags between when R&D is conducted and when technologies are developed. These problems are probably more acute for the kinds of R&D the government is best suited to pursue, such as basic science. In the post, How long does it take to go from science to technology? I summarize a variety of evidence pointing to 20-year lags as being reasonable for basic science (though note this is only a minority of government funded R&D).
Given all that, I think it is somewhat remarkable that we do, in fact, spend more than one hundred billion of dollars per year on R&D! At the same time, it’s not surprising that the share of federal spending devoted to R&D has been steadily declining for decades.
If R&D is so good, why does science have so many well publicized problems?
Science is done by people, and things done by people usually have problems. But two things are true. Despite its problems, the ROI of R&D is high. And we can and should try to make the ROI of R&D even higher.
I plan to write a lot more about ways to improve R&D efficiency this year, so watch this space.
What’s Your Preferred Policy?
I would prefer to increase (and certainly not decrease) government support for R&D. That said, I would be disappointed if we increased R&D but left our current innovation ecosystem fundamentally unchanged. The returns to R&D are high; but I think the returns to R&D about doing R&D are even higher.
More details:
The case for increasing government support research for R&D seems pretty clear to me. A variety of research suggests the marginal R&D of government funded R&D is high. Meanwhile, the government is well positioned to be the primary investor in American innovation, since it has claims on a broad array of the benefits of R&D, via the tax system (it’s possible government R&D is even self-financing). Besides, increases would hardly be unprecedented. Current levels of R&D support are below international and historic domestic benchmarks.
That said, it is challenging to know just how much R&D should. There simply isn’t good evidence on how the ROI of R&D changes over very large swings in R&D support. But it seems likely that the ROI would decline as we spend more. I doubt we could increase R&D 10x and still have it earn a good ROI, but it would be great to try much smaller increases.
But I don’t want to leave the impression that I think the US innovation ecosystem is beyond reproach, and that we should just write it a blank check. Instead, I think we should try to increase the productivity of the innovation sector, just as we try to increase the productivity of other sectors of the economy. To do that, we need to invest in technological progress in innovation itself.
Here’s a simple illustrative example. Suppose we assume that a dollar of R&D generates $5.50 worth of economic growth, via our ability to more productively use the factors of production. Let’s assume R&D about R&D has a similar efficacy: every dollar invested in meta-research generates $5.50 worth of increased research output, via our ability to more productively use the inputs to innovation and R&D. If each of those dollars worth of research output itself generates $5.50 in economic growth, then a dollar invested in meta-research ultimately generates 5.50 x 5.50 = $30.25 in economic growth.
Thanks for reading! As always, if you want to chat about this post or innovation in generally, let’s grab a virtual coffee. Send me an email at matt@newthingsunderthesun.com and we’ll put something in the calendar.
Strictly speaking, we might also want to discount for the fact that there is a lag between when R&D happens and when we realize the benefits to growth. This is about 20 years for basic science, but a lot less for applied R&D. However, since I am including the cost of building the technologies that embody new ideas as part of the costs of technological progress, and because those costs accrue shortly before benefits, these adjustments are too small to substantively affect the results.
I discuss a thought experiment to justify this intuition in the What About Other Benefits? section of the post, What are the returns to R&D?
I discuss some related research in the posts What if we could automate invention?, Prediction technologies and innovation, Do prediction technologies help experts or novices more?, and Combinatorial innovation and technological progress in the very long run.
Discussed in Government Funding for R&D and Productivity Growth
Even the government doesn’t capture all benefits, since some spillovers spill over to other countries. Nonetheless, the government is better positioned than private firms.
I’ve summarized some of this literature in the posts More Science Leads to More Innovation and Science as a Map of Unfamiliar Terrain. I think the post Science is Good at Making Useful Knowledge is most relevant to this argument.