Why Companies Are Boosting R&D While Other Business Investments Lag

While U.S. companies are building fewer buildings, ordering fewer machine tools and laying less pipe than a year ago, frustrating policymakers and taking much of the starch out of the domestic economy, they made private fixed investments in R&D at a 17% increased annual pace in the second quarter, according to the Commerce Department. That was the strongest R&D spending growth since 2006, adjusted for inflation and seasonal variations.

So while many CEOs have found reasons to refrain from boosting most business spending—such as lower oil prices and political uncertainties—collectively they have been picking up the pace of R&D spending. That has included a 23% increase in R&D spending versus 15% growth for equipment purchases and a 19% decline in spending on structures.

“R&D is like your seed corn,” Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, told the Wall Street Journal.

One key encouragement for CEOs toward greater R&D spending has been the fact that, after extending the federal R&D tax credit for a year or two at a time, Congress in late 2015 made the credit permanent, enabling business planners to have much more confidence in planning on the tax savings involved—and, therefore, making more R&D investments.

Still, far too many manufacturers—probably up to 80%—fail to understand that they may qualify for the credit, especially small and mid-market companies, according to Dean Zerbe, national managing director of Alliantgroup, writing recently in Area Development magazine. Often that is because they don’t know that the R&D tax credit encourages and rewards applied research, such as the work involved in bringing a new product to market, as well as basic research.

Meanwhile, many small and mid-market companies also may believe that they aren’t eligible for government R&D incentive programs because they aren’t operating in technology and research-focused sectors, tax experts recently told CFO.com. But many non-traditional and non-tech businesses can benefit from some combination of tax credits, grants and other incentives from the federal or state governments.

They range from the Start-Up NY program that offers the potential to pay zero taxes for 10 years to new and expanding businesses that partner with, and are on or near, an eligible university or college in the state, to a California R&D tax credit that follows the federal credit and offers a benefit for qualified activities taking place within the state.

Given the ongoing uncertainty about the direction of the U.S. economy, continued gains in R&D investment may become even more crucial for companies to emerge successfully on the other side of this season of disquiet.