CT R&D Spending Drops

By Greg Bordonaro and Brad Kane

Email: gbordonaro@HartfordBusiness.com | bkane@HartfordBusiness.com

Investment in research and development by Connecticut companies dropped 2 percent in 2009, mirroring a troubling national trend and hindering future state economic growth.

“In and of itself, the number may not seem like a big deal; but as a posterchild for the future of Connecticut, it is a big red flag,” said Fred Carstensen, director of the Connecticut Center for Economic Analysis. “This is a little piece of data that is screaming for attention.”

Eight of the 10 major companies in Connecticut reduced their R&D spending in 2009, dropping the total from $6.73 billion to $6.59 billion over one year, according to a recently released report by Booz & Company, a consulting firm that listed R&D spending by the top 1,000 global companies. The Connecticut figures represent total spending worldwide by companies headquartered in this state, not necessarily R&D spending inside Connecticut.

Total spending by the 1,000 companies worldwide dropped 3.5 percent, the first decrease in the 13-year history of the Booz study. The troubling figures were reflected in Connecticut’s number, which had shown R&D spending increasing steadily since 2004.

Even though the compound annual growth rate in R&D spending in Connecticut rose 2.7 percent over the previous five years, that’s still less than inflation, Carstensen said, meaning R&D decreased steadily over the past half decade at least.

The real issue arises in the future, Carstensen said, because today’s R&D becomes the technology companies build upon five to 10 years from now. With less R&D, the state’s industries become less competitive over time.

“If you thought this recession would be over quickly, this data shows how deep and long-term this recession really is,” Carstensen said.

Matthew Nemerson, president and CEO of the Connecticut Technology Council, said he isn’t shocked by the dip in R&D spending by corporate giants considering the poor economy. Of greater concern to him is the traditional lack of punch in Connecticut from the public sector.

Connecticut has always been in the top five states in terms of private per capita R&D spending, but that hasn’t been the case from public sector investment, Nemerson said.

According to a recent report by the Information Technology and Innovation Foundation, Connecticut ranked 37th in the U.S. in non-industry investment in research and development, with federal, state, university and nonprofit R&D funds only accounting for 0.37 percent of the state’s total GDP.

Connecticut ranked fifth in the U.S. in industry R&D investment, which made up 5.2 percent of state GDP.

“On an immediate basis, we must be equally as strong on the university R&D side,” Nemerson said.

Nemerson said Connecticut’s larger research schools — including Yale University, University of Connecticut and Wesleyan University — aren’t attracting the big federal government research grants because they don’t have big enough material labs or big expensive centers that attract that money.

Additionally, while Yale and UConn might be strong in bioscience research, they aren’t as well-equipped for bigger money-making research areas like theoretical physics.

On the private sector side, Nemerson said the big concern is making sure R&D investment dollars by Connecticut-based companies stay in Connecticut.

Increasingly, he said, large, global corporations are looking at overseas operations to put those investment dollars to work. And in many cases R&D dollars follow manufacturing jobs, which have been slowly exiting the state for years.

Among the Connecticut companies that cut R&D spending last year was United Technologies Corp. The the diversified Hartford manufacturer saw its R&D funding drop 14 percent to $1.6 billion. In its 2009 annual report, the company said the decrease was a result of cost reductions, lower requirements on key development programs, and lower expenditures at two of its Connecticut subsidiaries — East Hartford-based Pratt & Whitney and Hamilton Sundstrand in Windsor Locks.

In a prepared statement UTC said it expects company-funded R&D to be up about $225 million, or more than 14 percent, in 2010 compared to 2009.

Fairfield’s General Electric and Cheshire’s Alexion Pharmaceuticals, Inc. were the only two Connecticut companies to increase their R&D spending in 2009, according to the Booz report. Alexion — the state’s only pharmaceutical company in the report — increased R&D by 23.6 percent to $81.9 million in 2009 after scaling back from 2007 to 2008.

GE was the main reason Connecticut’s overall R&D spending didn’t plummet. The manufacturing and financial services conglomerate accounts for half of all R&D spending by Connecticut companies and increased 8.5 percent to $3.3 billion in 2009.

“We believe a strong commitment to innovation is fundamental to our company’s future,” said Todd Alhart, GE Global Research spokesman.

The Fairfield giant has its $250-million Healthymagination Fund and its $200-million Ecomagination Challenge designed to bolster innovation in the areas of environment, energy and health care. GE also opened several national and international research centers in the past few years, such as the $100-million Advanced Manufacturing & Software Technology Center that opened in May in Michigan.

Despite the recession, GE wants to continue its aggressive R&D push because the company must innovate to remain at the forefront of its industries now and over the long-term, Alhart said.

Praxair, the Danbury-based supplier of industrial gas, spent $74 million on R&D in 2009, compared to $97 million a year earlier, a decline of 31 percent.

Praxair spokesman Nigel Muir, said the reduction was related to the company discontinuing product development in one of its “non-core” businesses, which he declined to disclose. Praxair also made layoffs in its primary R&D hub in Buffalo, N.Y., which also cut into funding.

Muir said the company has boosted its R&D investments this year and will likely finish the end of 2010 ahead of last year’s pace.

Even so, only a very small portion of Praxair’s R&D investments are actually spent in Connecticut, Muir added.

To spur R&D investment, Carstensen and a handful of state legislators proposed letting companies cash in their R&D tax credits to build new facilities in Connecticut. With more than $1 billion in unused tax credits among the various industries, the Connecticut Center for Economic Analysis estimates the proposal would result in 4 million square feet of new facilities and 40,000 new jobs in the state.