The Avenue

State Governments Step Up R&D Investment

Scott Andes and Mark Muro

Conventional wisdom holds that some areas of public policy impact the entire country and are therefore inherently national. One obvious case in point is national security, where a single, unified security policy is essential for the country’s defense. Another is the nation’s research and development (R&D) enterprise, which has also typically been viewed as the special province of the federal government.

Yet now with federal paralysis pandemic, state and local leaders are taking control of their economic destinies and asserting themselves in many areas traditionally left to Washington—and R&D is no exception.  

According to recent data from the National Science Foundation, state government R&D expenditures increased by 11.3 percent between 2010 and 2011, while federal investments declined 9 percent during the same time period.

The academic literature on innovation systems has generally placed nations at the center of the analysis, emphasizing national tax, trade, intellectual property, and education policies. More specifically, the argument goes, R&D provides the nation with a number of positive externalities that are diminished when state and regional competition creates barriers to interstate knowledge exchange. Better to leave the federal government at the helm of large-scale investments and to drive coordination across multiple sub-national jurisdictions. While this may have been a valid point in the 1980s and 1990s when “national innovation systems” research was in its heyday, the way in which R&D is performed today is fundamentally different. 

In the past R&D has been organized vertically by a few very large domestic firms, universities, and national labs. Think Bell Labs. In such a climate there is no need to “go regional,” as national leaders can interact directly with the handful of major research-performing firms. Today, however, R&D is increasingly organized horizontally through thousands of small-and medium-sized firms across hundreds of complex supply chains. In such a climate, clusters, not countries, matter. Nevada R&D may be motivated by rapid technology transfer to young software firms, while Tennessee needs greater large scale investments in lightweight composites. What works in one region doesn’t work everywhere.

To be sure, states can’t go it alone—the federal government can and should ramp up national R&D investments. But in the meantime, successful state and regional leaders—public, private, and philanthropic—recognize R&D investments are a critical fuel of regional economic success. Innovation precedes exports, foreign direct investment, higher wages, and better standards of living. No wonder these leaders aren’t waiting for the federal government but are investing in research that supports their firms and unique industry clusters today. 

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