Friday, July 18, 2014

How US R&D Stacks Up With Other Data

Analysts should not have to guess about a business's R&D spending.  It's always in the financial statements for publicly held companies.  Finding the numbers requires some effort because FASB's SFAS 2 requires R&D to be expensed as it is incurred, meaning R&D costs are usually considered to be operating costs rather than capex.  Assembling a comparable number for the entire US is a different project because the data is scattered in several locations.  Government data offers a starting point for the R&D component of spending.

The National Science Foundation has a couple of interesting data sets.  Check out NSF's National Patterns of R&D Resources for a rundown of public R&D spending by source and sector.  The National Science Board's Science and Engineering Indicators report includes a chapter comparing the US R&D commitment to international competitors.  The NCSES InfoBrief for December 2013 has further breakdowns on multiyear R&D spending.  The general conclusions of these three data sources all comport with each other.  Their bottom line is that the US is losing its global lead in R&D spending.  It is worth noting that business R&D spending far outpaces both federal and university spending.

I am intrigued by the US's R&D data because this spending helps determine the nation's future innovation capacity and thus its prosperity.  I would like to explore whether a relationship exists between strong R&D spending and a normal US economy.  I will have to define my terms carefully before I proceed.  I do not yet have a firm definition of what constitutes either variable.  "Strong" R&D spending may be what drives normal GDP growth, and a "normal" economy may be one in which Tobin's Q has a value of 1.0 at its equilibrium.  The St. Louis Fed's FRED historial chart of Tobin's Q shows a big spike in the 1990s when IT spending for Internet connectivity took off.  I would be very intrigued to discover whether a similar spike in national R&D spending contributed to that spike.  It may of course be merely a reflection of the insane NASDAQ valuations for tech companies in that era.  Perhaps a normal economy displays a "Warren Buffett Indicator" close to its historical average.

Be patient as I work through this research idea.  I have other demands on my time.