TABLE III.-Federal Government obligations for conduct of research and development in fiscal year 1957 distributed by performance component

and agency [Thousands of dollars]

Department of Agriculture...

Department of Commerce..

Department of Defense:

Department of the Interior.

Post Office Department..

As indicated in table III, roughly one-half of total Federal obligations for research and development were made within the Federal research establishment itself with the other half being performed under Federal grant or contract outside the Government. Of the $1.3 billion extramural research and development, $417.6 million went to research centers owned by the Government but operated under contract by non-Federal organizations. Typically, these research centers are large installations which the Government chooses to have operated by a contractor rather than by civil-service employees. A list of research centers in operation, as of December 1956, is shown in appendix B to this report.

It is well to examine also the nature of the research and development which the Federal Government has done under grant or contract, differentiating between defense and nondefense research. This distinction is drawn because of the extent to which speed of performance and urgency in terms of the national security are frequently raised as factors tending to favor participation by large as contrasted to small organizations in Government contracts for research and development. Arbitrarily classifying the Department of Defense, Atomic Energy Commission, and the National Advisory Committee for Aeronautics as defense and all other agencies as nondefense, a distribution of Federal obligations for 1955, 1956, and 1957 is obtained as set forth in tables IV and V.

TABLE IV.-Federal Government obligations for conduct of scientific research and development 1

1 Data are based on obligations; exclude any estimates of Department of Defense funds for research and development from procurement and production appropriations.

2 Estimates; based on the Budget of the United States, 1957.

Includes pay and allowances of military personnel in the following amounts: (millions of dollars) 1955, 157; 1956, 165; 1957, 169.

For this purpose the National Advisory Committee for Aeronautics funds' are included in "Defense research and development." These funds are distributed as follows (millions of dollars):

In addition to the National Advisory Committee for Aeronautics "Defense research and development" includes total amounts for conduct of research and development as reported by the Department of Defense and Atomic Energy Commission.

NOTE.-Detail will not necessarily add to totals because of rounding.

Source: National Science Foundation.

TABLE V.-Percentage distribution of Federal Government obligations for conduct of scientific research and development 1

1

It will be noted that the bulk of federally financed research and development falls in the defense category. Nondefense research and development totals only $346 million out of a total $2.6 billion for 1957, or about 12 percent. Of this nondefense research financed by the Government, only $147 million is contracted out and of this amount, $133 million goes to nonprofit organizations with only $14 million to profit organizations. The significance of these data in terms of the problems confronting study group No. 6 is obvious. If it is conceded that the support of research and development by the Federal Government at colleges and universities is in the national interest and that the proportion of Federal grants and contracts for research and development which now go to universities should not be decreased in favor of small profit organizations, then it would appear that the only significant area for increased small-business participation lies in the defense category. A further examination of table III indicates that of the three defense agencies, the NACA performs practically all of its research within its own laboratories. It further indicates that of the extramural obligations of the AEC for fiscal year 1957 of $386 million, only $72 million went to contracts with profit organizations other than for the management of the large AEC research centers. In other words, of $1.3 billion of Federal extramural research, only $86 million outside the Department of Defense and large AEC research centers goes to profit organizations.

IV. SUMMARY

1. Scientific research and development is an increasingly significant aspect of the national economy and of American culture.

2. The conduct of research and development is requiring increasingly large initial outlays-capital outlays for physical facilities and equipment and investments of working capital to assemble high-priced scientific and engineering talent.

3. The need for research is not uniformly distributed over various companies disregarding size, value, added labor intensity, kind of product, etc.; i. e., "the function of small business is not necessarily to invent."

4. This raises the question as to the proper share of small business in the Nation's research activity. In no case need the share be constant for different sizes of business. Thus small business may well have more than its share in the production of highly specialized, custom type of merchandise, and perhaps less than its equal share in the development of new technologies and new things, sources of energy and processes in general.

5. There is, surely, an optimum of break-even point for research activity as there is for other inputs. And, as in the case of other inputs, such break-even points depend not only on the size but also on the kind of business. For instance, a steel mill employing 500 people is a tiny operation; a lampshade manufacturing establishment employing 500 is huge. Considerations of overhead costs are important and they vary in turn with size. It stands to reason that efficient research operation requires total operation on a level which can economically support high overhead resulting from such a research operation.

6. Note also that if small business became thoroughly technologized, it probably would be swallowed by large business unless it, itself, became large business. In other words, certain economic and general circumstances need be preserved for the sake of preservation of small business if preservation of small business is a desirable goal of economic policy. In general, it is rather obvious that maximization of research outputs by the national economy is not necessarily reconcilable with the equal share argument as applied to small business. Decision, therefore, need be made as to which of the two goals has precedence or, stated less categorically, the extent to which and manner in which each of the goals is to be modified in deference to the other.

7. The role of the Federal Government as a performer of research is a major one; as a supporter of research, its role approaches dominance (supporting, in 1953, at least 40 percent of research performed by industry and over 60 percent of all research performed by universities).

8. Performance of research by small businesses is widespread; however, in volume of research performed, as measured in dollars, small businesses accounted for only 10 percent of the total for United States industry in 1953; as measured in scientific and engineering manpower, small businesses accounted for only 20 percent-both measures in contrast to approximately one-third of total industrial employment accounted for by small businesses.

9. Federal contracts and supporting grants for research and development run to billion-dollar magnitudes ($1.3 billion in fiscal year 1957). However, the question of increased small-business participation therein appears to be confined largely to the defense area; and within that area, principally to the Department of Defense, unless it is argued that nondefense research and development which is presently primarily confined to Federal and State Government laboratories and universities and other nonprofit organizations should be shifted away from such institutions over to small business.

ECONOMIC FACTORS AFFECTING THE CONDUCT OF RESEARCH AND DEVELOPMENT BY SMALL BUSINESS FIRMS

I. ECONOMIC TRENDS IN THE UNITED STATES AS THEY RELATE TO AND ARE AFFECTED BY RESEARCH AND DEVELOPMENT

A. United States industrial technology has advanced to such a stage that continued progress in the production of new materials, devices, systems, methods, designs, and processes is dependent upon intensive research and development.

B. Consequently, research and development is becoming an increasingly significant aspect of the industrial economy and of American culture.

C. In turn, research and development is becoming increasingly essential to the survival of competing establishments in many industries.

D. The advancement of science is rendering more complex the performance of research, necessitating increased specialization of research effort; fields of science continue to subdivide and specialize as new discoveries open up entire fields for further exploration and exploitation. This trend has been accompanied by increased reliance upon team as contrasted to individual research. In other words, a research problem frequently has facets extending into several different specialties and subspecialties; and in lieu of attempting to cover them with one or more "generalists," a team of specialists is formed to carry out a coordinated attack on the problem.

E. Likewise, as the subject matters to which research is directed become more complicated, the physical facilities and equipment required for research become commensurately complex, and it is likely that the future progress of research in industry, as elsewhere, will be accompanied by an increasing ratio of the cost of tools (i. e., facilities and equipment) to the cost of manpower.