ITIF White Paper Advocates for Greater Federal Tax Credits to Keep U.S. Ahead of China in R&D

Source: ITIF White Paper

Today, the Information Technology & Innovation Foundation (ITIF) published a white paper titled Innovation Wars: How China Is Gaining on the United States in Corporate R&D showing that, while the United States continues to enjoy a lead in several key sectors when surveying the world’s largest corporate investors in research and development (R&D), its largest economic rival is gaining and could achieve parity with the United States in about a decade.

Top U.S. Corporations Still Enjoy Significant R&D Lead in Pharmaceuticals and Software

ITIF’s report draws on data published by the European Commission, including several editions of the EU Industrial R&D Investment Scorecard, which tracks about 90% of the world’s R&D expenditures by the 2,500 largest R&D firms. Breaking down this data into nine advanced trade sectors, ITIF found that U.S. R&D investments either declined or remained stagnant in seven sectors as innovation expenditures by Chinese corporations rose.

While U.S. R&D spending in advanced sectors rose from 80% above the global average in 2013 to 100% over the global average in 2021, Chinese R&D spending in those same sectors over the same period of time rose from 80% below the global average to 30% below the global average. China still has ground to gain, but ITIF expects that the Asian nation’s momentum should help it pull even with the U.S. by 2034 in all sectors except for software.

Source: ITIF

Of the nine sectors covered by the ITIF report, the United States remains dominant in R&D spending in software and computer services. In 2021, 197 U.S. domestic firms in this sector made the EU R&D 2,500 Scorecard, well ahead of the 73 Chinese companies making the list. Those 197 U.S. firms accounted for just over 75% of global R&D spending in the sector. The pharmaceuticals and biotechnology sector was another advanced industry where the United States enjoyed a significant lead over China. There were 263 U.S. pharmaceutical firms in the 2021 EU R&D 2,500 Scorecard. While those companies only accounted for 52.6% of R&D expenditures in the sector, Chinese companies only contributed 5.8% of global R&D spending that year.

Federal Tax Credits and Restoring Patent Eligibility Could Both Be Part of Solution

A different picture of Chinese competitiveness in R&D emerges when examining the electronics and industrial engineering sectors. The 106 Chinese electronics and electrical equipment companies making the 2021 EU 2,500 list spent $24.1 billion in R&D that year, nearly double the R&D expenditures by the 41 U.S. electronics companies making the EU’s R&D survey. In industrial engineering, which includes the manufacture of farming, construction and other heavy equipment, U.S. firms averaged higher expenditures than their Chinese counterparts. However, the larger number of Chinese companies in the sector resulted in total R&D expenditures of $12.5 billion during 2021, nearly $4 billion more than their U.S. counterparts.

Source: ITIF

ITIF includes a few policy conclusions that the U.S. federal legislature should consider in order to maintain the nation’s lead in R&D expenditures in advanced sectors. Specifically, ITIF’s report advocates for Congress to increase the Alternative Simplified Credit from 14% to 20%, noting that the nation currently ranks 24th out of 34 Organization for Economic Cooperation and Development (OECD) countries in terms of tax support for R&D spending. ITIF also supports Congressional passage of both the ALIGN Act, which would enable businesses to more quickly claim deductions on equipment investments, and the American Innovation and Jobs Act, which would give R&D companies the option to either claim R&D tax credits or deduct R&D costs during the year in which they’re incurred.

While Innovation Wars notes that improvements to Chinese R&D are based in part on intellectual property theft, ITIF’s report mainly ignores legislative efforts like the Patent Eligibility Restoration Act (PERA). Uncertainty in patent eligibility has been shown to decrease levels of R&D investment. By ITIF’s own admission, its survey only covers the 2,500 largest R&D firms worldwide, which should give IP rights advocates a good opportunity to point out how restoring certainty to patent eligibility can help U.S. small innovators turn the R&D tide even further in the nation’s favor.