Why America Must Boost R & D, Cut Litigation
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

Governor Romney pushed a lot of the right buttons when he spoke before an enthusiastic Wall Street crowd at the New York Athletic Club on Monday.
In addition to touching on the need for a coherent energy program, a strong defense against the terrorist jihad, reducing corporate taxes, enhancing our country’s competitiveness against Asian economies, combating overregulation, and strengthening education, Mr. Romney said: “U.S. corporations spend more on litigation than they do on R&D.”
Many in the sold-out room wondered: Is that possibly true? If so, what are the implications, and what to do about it?
Most inquiries into our litigation burden start with a study conducted annually by the actuarial firm Towers Perrin. The survey for 2005 (the latest available) shows that tort costs in America amounted to $261 billion in that year, or $880 for every man, woman, and child in the country. The study points out that, since 1950, the growth in tort expenses has outpaced that of the economy by an average of 2% to 3% a year. Moreover, the study’s author, Russ Sutter, points out that “tort costs per capita have risen by a factor of more than nine between 1950 and 2005.”
Expenditures to fight or settle malpractice and other litigation fall heavily on the shoulders of U.S. corporations, of course, because, to paraphrase Willie Sutton, that’s where the money is. However, class actions are not the only burden borne by U.S.companies.
Global consulting giant McKinsey & Company published a report earlier this year detailing the erosion of New York’s position as the center of the financial universe. The report pointed out that it wasn’t only international companies that were increasingly choosing to list their shares abroad, but that even small American companies had shifted their affections to London. An article on the report at PointofLaw.com concludes that a leading reason New York firms are losing business is “because they have a big handicap: crippling regulatory and legal environments.” The McKinsey report cites one American executive as saying: “People feel less encumbered overseas by the threat of regulation and so are more likely to think outside of the box.”
Thinking outside of the box is what America does best, in theory. As I wrote earlier this week, it is the intellectual power of this country that drives those American industries that continue to be globally competitive. Surely that engine will misfire if our companies do not continue to invest heavily in research and development.
According to the National Science Foundation, American industry spent $223 billion last year on research and development, up 6% from the 2005 total. This outlay compares with the $261 billion cited by Towers Perrin as the expenditure for litigation. Both figures are doubtlessly flawed to some degree, but Mr. Romney has a point — they are distressingly similar.
Is this a problem for America? It would seem so. The National Science Foundation has compared R&D expenditures by region and, not surprisingly, found that the America and the European Union were losing ground to Asian competitors. R&D outlays in Asia surpassed those in the E.U. in 2002, and in 2003 they were 10% higher. In the same year, such expenditures amounted to 79% of the U.S. total.
Here’s the scary part: Between 1991 and 1996, “R&D in Asia grew at a much faster annual rate (7.9%) than in the E.U. (3.4%) and in the U.S. (3.3%). After 1995, growth accelerated in Asia to an annual average of 8.7%, exceeding that of the E.U. (5.4%) and the 6.0% U.S. average.” The survey points out that outlays in China roared ahead at a 20% annual clip between 1995 and 2003. The only country where such spending trailed America was Japan. That says it all.
These figures should alarm our policymakers. By far the largest spenders on R&D are those sectors where America still occupies an important competitive position. Industries such as pharmaceuticals and information technology not only employ millions of people in this country, but to date they are also remarkably profitable, contributing heavily to the nation’s tax base. It is extremely important to generate policies that will keep these businesses healthy.
So, how to encourage R&D expenditures and ensure the future of those enterprises? Two possible lines of attack come to mind. The first is to encourage the growth of small businesses. It turns out that companies with less than 25,000 employees carried out 62% of industrial R&D in 2005. Companies with fewer than 500 workers performed 18% of all industrial R&D, while accounting for only 9% of sales. The ratio of productivity appears to diminish as the number of employees and amount of revenues grows.
In other words, entrepreneurship is alive and well in America. The Small Business Administration says there are 25 million small businesses in the U.S., and that they account for 50% of private non-farm GNP. Most important, they create between 60% and 80% of new jobs and are “13 to 14 times more innovative per employee as large firms.”
Fortunately, the SBA’s Office of Advocacy champions a delicate approach to regulating small businesses, but the incoming administration must make protection of this sector the highest priority.
Second, the private sector should work toward reducing the short-term focus that is arguably limiting American competitiveness. All too often companies cut expenses in areas likely to bear future fruit in an effort to meet Wall Street’s quarterly earnings expectations. R&D expenditures, plant relocations, training programs, and other forward-looking outlays are the first to go. In the dot-com recession, for instance, total U.S. R&D outlays shrank to as little as $186.1 billion in 2002 from about $200 billion in 2000 (in constant dollars). It took until 2005 for expenditures to set a new high.
One American CEO that we know asked a Chinese competitor: What is your time frame for investing? The answer? One hundred years, and he wasn’t kidding.
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