In our modern world, the ongoing technological innovation is widely recognized as the key to competitive stability of a company in their market of operation. As this is true for most active players in the market, it is crucial for each to enhance their R&D attachments. There are however difficulties in the forms of ROI evaluations, a lack of active capital access from government and industrial investment funds: especially for small and medium firms.

So what are the options left for a firm to access quality R&D, which can design their innovative road to win the competitions?

R&D Funding as such

First let’s build the ground floor of how R&D is generally funded. Global R&D spending is expected to get over 2.47 trillion US dollars in 2022. In contrast, in 2005 the Global R&D spent managed to get close to 1 trillion US dollars, and in 1996 it got to “only” 555 billion US dollars. With the recession in 2020, R&D spending decreased, however, since 2021 global R&D investments are getting back on the growth track.

Total R&D spending trend for years 1996-2022
GDP spending on R&D (million US dollars), compared to OECD total (1 279 064 million US dollars source:

As the US federal government makes it one of the three if not the highest R&D-investing country, let’s boil the above numbers down just for the US and for the year 2022. This year, the US federal government has been forecasted to invest 181.4 billion US dollars in R&D, more than all other countries (except China and Japan, however, the Government-Private sector cooperation is built on special terms for these countries). The US academia, on the other hand, will reach 23 billion US dollars in R&D investments, and as for the US industrial organisations, the collective investments to push the R&D efforts will be reaching as high as 65.8% of the total R&D investments from the US (679.4 billion US dollars) – amounting to 447 billion US dollars. This industrial investment is 2nd to China.

In the EU similarly, R&D is a cornerstone, put through in the Political Guidance for the next European Commission. The total government budget allocations for R&D (GBARD) reached to 109 250 million EUR in the EU which was the 0.8% of the GDP (6% over 2020)

Government budget allocated to R&D

Let's look into the global R&D spending per sector as well as the global private-sector R&D focus:

S&P Capital IQ, authors’ research

Surely, pharmaceuticals are the sector with the higher R&D spendings, especially within the past few years and it keeps getting the same attention as it has the higher percentage of revenues from R&D investments, it has the close ties to academia through both government and private R&D funds. At the same time, the contrast based on profits from industrial R&D investments shows that high-tech, automotive, and consumer products are increasingly showing higher interest in R&D investments – with more than 20 % of earnings (earnings before interest, taxes, depreciation, amortization) back into R&D

R&D Spending by Company 2020

Some of the companies spending most on R&D during 2020 were Amazon: 42.7 billion US dollars. Alphabet, Inc.: 27.6 billion US dollars. Huawei: 22 billion US dollars. Microsoft: 19.3 billion US dollars. Apple: 18.8 billion US dollars. Samsung: 18.8 billion US dollars. Meta (Facebook): US 18.5 billion US dollars.

Even then the volume of investments from these companies was larger than R&D investments of some industry verticals, or countries for that matter. And now, with the shortages of Microchips, and the bloodbath of competition within the automotive for the EV market – the investments are expected to grow even more drastically. This notion is backed by the billions of dollars invested in newer, better EV manufacturing and battery plants internationally.

Just in the US General Motors and Ford are rehabilitating their previously closed plants and building new ones. The same is true for the space trend. A number of R&D programs related to space have been expected to move closer to the sun (pun intended) this includes the James Webb Telescope recent achievements or SpaceX’s Starship “highly likely” launch in November.

Now all these above factors in mind, who would you give the credit to, and thus who should the R&D researcher, scientist, or startup go to, to find the more productive way to a successful project, or simply, a firm looking to enhance its capacity in the highly technologically competitive world? is it government-powered funds, or is it private funds to consider first?

Government vs Private Sector in Terms of R&D. Who’s the Real Hero?

What are the R&D and innovation types that can be considered in this context, especially from the point of Outcome? The US National Science Foundation split it into three branches:

  • basic research;
  • applied research;
  • development.

The first is described as an experimental work or tasks that have theoretical nature and are performed to access new knowledge. The applied research on the other hand has a clear eventual target. The development is the practical step of applying the knowledge into formed experiments to achieve new knowledge, and eventually either a new product or an improved product.

For governments, it is more likely to take the road of basic research, although basic research is usually a smaller share of the total R&D per country (around 15% of total US R&D efforts in 2019). The main reason why the private sector is not as keen on taking over the basic research funding is the law's potential profit yield from these investments. This is not to undermine the importance of basic research, as it has a clear high payoff in terms of social importance, and accumulated knowledge.

The debate can be made in favor of basic research, in fact, vouching for the eventual importance of the knowledge that gets discovered during the research – these are such examples as Google getting its start from a federal grant, or the development of the Internet as such (the involvement of DARPA Funding is undeniable here). Even though similar examples are actively ongoing, and significant, it is crucial to notice that such knowledge gathered from basic research is brought to its productive state by the private sector, which turns the research into a consumer good and ensures demand from the people.

Applied Research, therefore, is something more preferred by the private sector: turning science into technological change – this is where innovation shines! As stated in William D. Nordhaus’s Schum­peterian profits in the American Economy the wealth generated by producers of innovation is an ice cube compared to the iceberg of benefits it ends up bringing the general population (less than 2.5% in fact), thus, if not a fair game, the existence of innovating companies (however, one might think of their public decisions) is at least highly beneficial for the general population. Just as the government intended, right?

This brings us to the main takeover of the original question of this paragraph – who’s the real hero – evidently, the one does not exist without the other, and both contribute to the same eventual causes, each in their specific form, thus, there is not a competition between Government and Private-funded R&D, but rather they are better solutions for their custom tasks.

Firms’ Access to R&D, and to R&D effects

What is the motivation of a company when investing in R&D today? Be it a MedTech, Telco, or Composite pre-preg manufacturer, fundamentally the R&D investor private company expects the R&D effort to yield a technology that can be developed into a new or highly upgraded product.

The experience shows that R&D is as successful as the organization’s core team is giving it due respect. When R&D is accepted by a firm as a cornerstone of achieving as well as shaping the corporate strategies – the R&D efforts and Returns on Investments are likely to match if not overcome the ceiling of the firm’s expecta­tions. The R&D access is especially crucial for a company’s com­petitive “edge” due to the:

  • potential differentiated offer it has with the new product for the market;
  • the exclusive edge it has over its competition;
  • the new business prospects that are opened up.

This access to R&D and innovation is not straightforward for a firm. As it has to first, be properly, financially backed in the planning process, and the ROI from R&D is not a feature found in simple calculators. While the private sector is responsible for fostering excellent achievements of scientists, university researchers (R&D professionals, scientists, Ph.Ds, etc.) are still occupied in more than half of all basic research (especially true in the US and EU).

percentage of R&D academics per focus source:

This means that for a firm to access R&D – the relevant knowledge and insight, the academically-acclaimed talented human resource, especially one with some understanding of business development – the firm needs to have a specific game plan and to be attractive and accommodating for such talent, within itself or in a form of partnership (outsourced R&D).

Some good action steps to start with are:

Awareness of What Else Is Out There

A good way for a firm to detect, gather and access crucial research and keep the finger on the pulse of ongoing achievements by competition, is to monitor the activities in the academic world. Eventually, the academic achievements worth commercializing will be taken forward by the private sector, and as long as government-funded research is commonly open so is the access to scientific journals – gathering market knowledge is possible even from the lab.

With the open access to the relevant events/conferences, it is also important to send the internal R&D capacity out there for physical meetings, pitching, and communicating with the market – this is a push & pull strategy helping the firm to reach for the knowledge and for the potential knowledge to know the place of the firm.

Befriend and Partner Up with Academia

A working practice to access the up-and-coming R&D, is to partner up with academia and get an inside track to research as opposed to the competition – the firm that has proper partnership relations with academia does not have to wait (sometimes for years at a time) for the results of research to be published in scientific journals.

Even though corporate partnership gives academia more flexibility, at the same time it is now much closer to a proper business relationship, thus the pressure of results is higher, and academia is expected to DO MORE , than in a usual government-funded R&D project. Firms here use their negotiating power and lawyers to access the first right of refusal as well as the opportunity to stop the funding if set milestones aren’t met.

Open Innovation

Putting your internal challenges out there to find an external solution may sound risky for an extra careful one, however, this is another practice of accessing R&D knowledge both from within and outside of academia, from sophisticated companies and startups, open innovation calls make it possible for the firms to access targeted solution for the specific challenge while gathering insight of the topic and other market players in the vicinity of the topic.

Open Innovation brings us to startups, especially deep-tech ones, where both academia finds freedom and ability for applied research, and the firm is able to access/outsource the R&D necessary to create its edge in the ongoing innovation battle.

Especially for the big players and their subsidiaries, looking to create revolutionary solutions, exploratory yet targeted research is the way to pass through the competition.

Startups as the Novel Corporate R&D

Both academia and startups, especially within the high-tech and med-tech contexts – are particularly relevant to each other, given the fact that both of these entities represent two core factors involved in entrepreneurship as such – competitive advantage and driving power to capitalize on that advantage.

Often firms prefer the short-term fixed volumes of innovation that tend to bring some value which keeps them from larger investments, and the scientists with R&D capacity of game-changing solutions find themselves without proper financing from neither Government funds or the larger firms.

The two identified reasons are(Killing the Golden Goose? The Decline of Science in Corporate R&D):

  • Facing increasing competition – firms prefer to protect the existing knowledge and keep the investments in commercial applications rather than risk and innovate on a large scale.
  • In the past decades (starting around the 70s) The inherent unpredictability of basic research has been harder to calculate, monitor and control for the firms, thus decreasing the motivation to deploy assets towards unclear investments.

For the aforementioned reason, more and more scientists find themselves on the path of becoming founders and having to access the entrepreneurial world as well. With this, startups are increasingly becoming the faster route to commercializing academic research – just from 1996–2017 over 14000 academia-based startups were formed and the figure gets added on by at least 1000/year from then on.

Why Is It Relevant for the Scientist

Usually, the Ph.D. programs of scientists do not cover entrepreneurial skills, marketing or selling is not a common trend to focus on and the final solution is usually not envisioned from the customers’ point of view, thus accessing a business partnership or becoming a scientist-founder becomes an alternative to the usual scientific journey (Ph.D., postdoc, doctoral degree, professorship/get­ting accommodate in an industrial setting).

Now, there is nothing wrong with the usual way – the Academic Prestige, Basic Research focus, Predictability of the daily operations, access to great technology and resources covered by government or private-funded institutions – these are all fine and have the palace to be.

However if the scientist has a certain discovery and vision for it, wants an intellectual freedom, trust and agility in their own process, prefers fast pace, is ready to interact and align with the potential business needs and requirements – startups are a perfect solution. And eventually, the startups are usually in much higher demand of a scientists , whereas in academia there are usually few professorships for so many postdocs.

Why Is It Relevant for the Startup

With the kind of culture startups bring out for academics – it is now not expected to be of a certain middle age, to have been through decades of academic achievements to be able to access the scientific progress – with more women in science and better access to education in the world, the landscape is changing and there are more professionals for startups to partner up with.

Startup is a riskier step of the entrepreneurial journey, thus for the startup and investors, being sure of their service/produc­t’s bulletpro­of performance is of utmost importance – scientific and academia-based research is the better PR to communicate the goods, thus finding potential investors, customers and early adopters becomes an “easier” challenge to solve.

Hiring consultants is costly, thus directly accessing the R&D knowledge in the source of the future service/product is a huge benefit for startups.

Even though it can be costly to hire scientists, it is eventually more bulletproof and saves on other fronts, such as finding new talent, which now can be done through the network of the academic personnel employed in the startup.

Finding capital can be cooperatively beneficial for the marriage of startups and academia, as there are various grants that are better attracted and handled through academics while being a startup gives additional access to VCs.

Why Is It Relevant for the Firm Which Potentially Employs or Partners with Both

Larger firms gradually rely on startups more and more for innovation development. They intend to finance a few research projects, Proofs of Concept, to access the potential solutions of their internal challenges through external entities such as Academia, Research-based startups, or deep-tech startups in general.

Be this in the form of outsourcing R&D within strategic verticals, through buying out startups or through Open Innovation calls – eventually the larger firm has the upper hand through the negotiating power, thus can navigate their way to access the Tech Startups services or products in highly competitive, or even exclusive terms. This, of course, when they manage to properly locate the startup and the issue to solve.

Not to forget also the flexibility and speed of work with startups which tend to be superior to the usual corporate operations, especially when it comes to R&D.

Often the outsourcing itself does the magic: corporate has a need for very specific technical solution, they outsource an R&D startup and get the solution and training for their internal R&D capacity. Now the company has a more cost-effective solution to their R&D issues, and a more competent internal R&D resource.

So, the larger firms seek unique innovative startups, which in their turn look for continued access to R&D, research, and academic “manpower”:

Firms(Science + Startup) = R&D with the highest RoI

eventually Startups Become the Corporate R&D of the modern world!

Tigran Hovhannisyan
With a B2B sales & marketing background in INGO & Foreign Investments in government sectors, Tigran is now responsible for extensive industry research in RVmagnetics focused on marketing the company both in R&D and Business spaces. Tigran is up to date with trends in deep tech, sensors, and innovative startups in need of niche growth. He shares the knowledge with RVmagnetics communities via blogs, publications, and news releases, while also using his experience to Manage RVmagnetics' Key Partners' accounts.