Nondefence R&D spending at United Kingdom businesses dropped by 6% in 2004, adjusted for inflation, according to a new report. (Thanks to Stumbling and Mumbling and Brad DeLong).

That's a big decline. As Chris Dillow of Stumbling and Mumbling points out:

The link here is both causal and diagnostic. Lower R&D spending could cause slower technical progress, which is the main contributor to long-run GDP growth. And it could be diagnostic of slower growth, as it signifies that firms are pessimistic about the future.

Second, there are interesting questions here. Why is R&D spending falling when interest rates are low and corporate cash balances healthy? Have firms cut the productive or unproductive parts of R&D spending? Can they tell?

Looking at the numbers a bit closer, it turns out that most of the drop has come from a cutback in U.K. government funding, combined with a cutback in funding from overseas sources. The companies themselves have done a pretty good job keeping up their own spending.

By the way, the 2004 figures for U.S. R&D spending aren't out yet.

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