The Licensing Payoff from U.S. R&D

Article excerpt

Each year, American industry receives more than $100 billion in royalty income from its investment in research.

OVERVIEW: The United States spent 2.5 percent ($171 billion) of its Gross National Product performing research and development in 1996. Industry spent the lion's share of this amount to develop commercial products while the federal government and other non-profit organizations worked primarily in applied and basic research. For its efforts, U.S. industry received $130 billion in royalty income in 1996. Approximately 50 percent of this came from licenses with affiliated entities, many of whom were based outside of the United States. Government data show that the United States licenses-out to foreigners, particularly the European Union, four times more technology than it licenses-in. Statistics also show that there is a strong positive correlation between research, innovation and U.S. economic prosperity.

As the United States has down-sized its defense budget, the U.S. federal government has concomitantly down-sized its funding of basic research, while U.S. business has almost proportionally increased its developmental R&D funding. The net result, along with other factors like the breakup of AT&T, has been an overall change in research activities within the U.S. resulting in less basic and applied research and more developmental research. As Table 1 shows, U.S. industry spends heavily on the development and commercialization of technologies while the U.S. federal government, academia and other non-profit organizations spend heavily on basic research. In fact, as Table I shows, the U.S. public and non-profit entities performed over 75 percent of America's basic research in 1995.

On question frequently asked is: Are the American people and businesses getting a fair return on their R&D investment? Although there are no generally accepted measures of the value or success of innovative activities resulting from R&D efforts within America, a proxy may be the amount of royalty revenues from technology licensing received by American organizations (1). To determine a reasonable approximation of the total royalty income received by U.S. entities, data were obtained from various sources, including federal tax returns filed with the Internal Revenue Service (2), surveys performed by the Association of University Technology Managers (3), and data collected by the National Academy of Sciences (4) and the U.S. Department of Commerce (5). The figures in Table 2 are estimates and encompass all forms of U.S. royalty income from intellectual property licensing, excluding agricultural and mineral rights, for 1996.

U.S. Royalty Revenues

The $136.3 billion in royalty income comes from numerous domestic and international sources, including: licensing of industrial products and processes; royalties from book, software, record and tape publishing; and franchise and broadcasting fees. The data clearly indicate that 49 percent of the royalty income received by corporations is from affiliated entities, including subsidiaries and joint venture arrangements. This means that around half of all business licensing is with related parties rather than with independent outsiders. This tendency is primarily the result of how U.S. corporations transact international commerce (see Table 3).

Table 2 also highlights that individual inventors in the United States receive significant amounts of royalty income. This is to be expected since individual entrepreneurs and inventors within the United States personally hold significant intellectual property assets; for example, 13 percent of the patents issued by the U.S. Patent and Trademark Office (6) in 1997 went directly to U.S. citizens.

Another interesting fact is that while universities and colleges performed 12.6 percent of all U.S. R&D research (Table 1 ) they received only 0.4 percent of the total U.S. royalty income (Table 2). …