Research and development expenditure

Research and development (R&D) expenditure is estimated to reach $474.2 billion in 2025, representing a 2.5% increase from the previous year. Budgetary constraints persist due to prolonged high interest rates and lingering recessionary fears, which have caused businesses to be cautious when allocating funds. Geopolitical uncertainty, especially in relation to China, continues to prompt companies to reconsider supply chain strategies, contributing to restrained R&D budget growth. Despite these pressures, advancements in artificial intelligence and other emerging technologies have partially offset reduced spending by driving renewed interest in innovation, helping to keep R&D investment on an upward trajectory.

R&D expenditure followed a moderate upward trend from 2020 to 2025, increasing at a compound annual growth rate of 3.6%. Following a decline of 4.8% in 2020 attributable to the COVID-19 pandemic, spending rebounded sharply in 2021 with a 6.1% increase, bringing investment above pre-pandemic levels as companies resumed projects paused during lockdowns and responded to new market opportunities created by digital transformation. However, momentum slowed in 2022 and 2023 as inflation surged and macroeconomic uncertainty grew. Businesses responded by tapering R&D investments, particularly in sectors most sensitive to consumer demand. Additionally, rising interest rates increased the cost of borrowing, further constraining capital spending. While R&D activity in manufacturing, which represents a substantial portion of private investment, continued to track closely with shifts in consumer and global trade dynamics, non-manufacturing sectors such as technology and professional services saw steadier commitment to R&D but remained indirectly exposed to broader business cycle fluctuations. Throughout the period, the share of private versus government funding remained stable, with private enterprises contributing approximately 90.0% of total expenditures. The persistent lack of significant public investment limited the counter-cyclical effect that government funding could provide, reinforcing the close correlation between R&D spending and overall corporate profitability.

Technological innovation remained a critical macro trend, driving sustained investment even as challenging economic conditions persisted. Artificial intelligence, automation, and digitalization efforts across multiple industries have proven essential to maintaining competitive advantages and prompted companies to prioritize innovation despite resource constraints. Over the five years to 2025, these factors have underpinned the overall upward movement in R&D spending, as businesses aimed to capture new market segments and improve operational efficiencies in an evolving economic landscape.