Research and Development: Who Pays for New Knowledge?

How businesses, governments and universities share the cost of research, and why governments fund basic science that companies often will not.

Research and development, usually shortened to R&D, is the work of creating new knowledge and turning it into products and processes. Countries differ a great deal in how much they spend on it, and who pays.

How much countries spend

R&D spending is usually measured as a share of GDP. According to OECD and UNESCO data, Israel and South Korea spend around five percent of GDP on R&D, among the highest in the world. The United States spends a bit over three percent, and China over two and a half percent, a share that has risen quickly. Many lower-income countries spend less than half of one percent.

In rich countries, most R&D is paid for and carried out by businesses. Governments and universities account for a smaller share but play a special role.

Basic and applied research

Economists distinguish between two kinds of research. Applied research aims at a specific product or use, such as a longer-lasting phone battery. Basic research seeks to understand how the world works, such as the physics of materials, without a particular product in mind.

Companies tend to underinvest in basic research. Its payoffs are uncertain, often decades away, and hard to keep private. Because the benefits spill over to everyone, governments fund much of it through universities and research agencies.

From basic science to your pocket

The GPS navigation in a phone depends on atomic clocks and on corrections from Einstein's theory of relativity. Neither was developed with navigation in mind. The GPS system itself was built by the U.S. military. Decades of publicly funded basic research made a consumer product possible that no company would have paid to invent from scratch.

Policy tools

Governments encourage R&D in several ways: direct grants, funding for universities, public research laboratories, and R&D tax credits that reduce taxes for companies that spend on research. Economists debate which tools work best. Tax credits are simple and let companies choose projects, while direct grants can target areas like health or clean energy where society’s needs are greatest.

Thinking companies do all the important research

Private firms carry out most R&D in rich countries, but many foundational discoveries, from the internet's early networks to key medical science, came from publicly funded research. Business and government research work best as partners, not substitutes.

Key takeaways

R&D spending ranges from around five percent of GDP in Israel and South Korea to far less in many poorer countries.
Businesses carry out most R&D in rich countries.
Companies tend to underinvest in basic research, so governments fund much of it.
Grants, public labs and R&D tax credits are the main policy tools.