China biting at US heels in R&D spending

A report from ITIF warns that China is catching up with the U.S. in private R&D funding. If this trend continues, China could surpass the U.S. in innovation in nine critical advanced technology sectors: aerospace and defense, electronic and electrical equipment, general industrials, industrial engineering, pharmaceutical and biotechnology, software and computer services, technology and hardware equipment, alternative energy, and automobiles and parts.

Looking at the numbers from 2021, when U.S.-headquartered firms spent twice as much on R&D as the global average in these sectors combined, the nation could be confident in its leadership position in innovation. However, when the authors compared the performance of firms in each country with the global average after adjusting for the size of each country’s economy, they found that China is increasing its R&D spending at an accelerated rate and could catch up to the U.S. by 2034.

The authors created location quotients (LQs) that reflect the differences in wages between the U.S. and China. These adjusted numbers show that China is already close to the global average of R&D spending in relation to GDP in all advanced industries except pharmaceuticals and biotechnology, aerospace and defense, and alternative energy. Adjusting for China’s lower R&D salaries, U.S. firms only spent 80 percent more than Chinese firms—$529 billion compared to Chinese firms’ $295 billion.

Expanding programs that fund joint industry-university research, boosting the Alternative Simplified R&D Credit rate from 14% to at least 28%, and restoring R&D expensing, are various ways the authors suggest the U.S. could return to a more competitive position in the global economy.