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How US Government Science Investments Drive Economic Growth: The Data Behind the Returns

When policymakers debate government spending priorities, scientific research often faces scrutiny as a “nice-to-have” rather than an economic necessity. However, a growing body of evidence demonstrates that government investments in science research generate substantial returns for the US economy, with measurable impacts on GDP growth, job creation, and private sector innovation.

The Return on Investment: What the Numbers Show

Multiple economic studies have quantified the remarkable returns from government-funded research. According to economists Charles Jones and John Williams of Stanford University, the National Bureau of Economic Research, and the Federal Reserve Bank of San Francisco, the return on investment for publicly funded scientific research and development is somewhere between 30 percent and 100 percent, or more.¹

This finding is supported by international research. A Science|Business Network report reviewing economic studies globally found that the long-term return on public R&D investment clusters around 20 percent annually, compared to 6.8% for the S&P 500 or 3.1% for Euro Area Government Bonds.²

The Scale of US Investment and Impact

The United States leads global R&D investment in absolute terms. At over $700 billion in 2020, US R&D expenditures exceed those of Japan, Germany, South Korea, France, India, the United Kingdom, and Russia, combined.³ The ratio of U.S. research and development to gross domestic product, at 3.40% in 2021, exceeded 3% for the first time in 2019.⁴

NIH: A Case Study in Economic Impact

The National Institutes of Health provides a compelling example of research investment returns. Discoveries arising from NIH-funded research provide a foundation for the U.S. biomedical industry, which contributes over $69 billion to the U.S. GDP each year and supports over 7 million jobs.⁵

Specific NIH programs show remarkable multiplier effects:

  • A $1.00 increase in publicly funded basic research stimulates an additional $8.38 of industry research and development investment after 8 years⁶
  • Thanks to the Human Genome Project and subsequent molecular technologies—which received significant NIH support—the field of human genomics now supports over 850,000 jobs, has over $265 billion in total economic impact per year, and yields a return of investment of $4.75 for every $1 spent⁷

The Multiplier Effect: Government R&D vs. Other Spending

Recent economic research demonstrates that government R&D spending produces larger economic multipliers than general government expenditures. A study published in Industrial and Corporate Change examining 15 OECD countries found that public investment in R&D generates the largest multiplicative effect both on GDP and business R&D than the one associated with more generic public expenditures.⁸

The International Monetary Fund’s comprehensive analysis of fiscal multipliers provides additional context. Their research found that first-year multipliers generally lie between 0 and 1 in “normal times,” but can exceed 1 in certain circumstances.⁹ Importantly, studies demonstrate that Federal spending on R&D stimulates additional private spending on R&D, with complementarity holding up in basic as well as applied research—meaning an additional dollar of Federal R&D expenditures adds more than a dollar of R&D investment to the economy.¹⁰

Concrete Examples of Economic Impact

Success Stories from Government Research

The economic impact of government research extends far beyond academic papers. Google, which was started by a couple of students working on a research project supported by the National Science Foundation, is today worth an estimated $250 billion and employs 54,000 people. This alone would pay for nearly all the program’s costs reaching back to its inception.¹¹

Other transformative technologies with government research origins include:

  • The Internet (DARPANET)
  • GPS technology
  • Touchscreen interfaces
  • Medical imaging technologies
  • Advanced materials and nanotechnology

COVID-19: A Recent Example

The COVID-19 pandemic showcased the economic value of sustained government research investment. Operation Warp Speed delivered vaccines at unprecedented speed—by January 2021, only eight months after the program’s launch, five of the six contracted vaccine manufacturers had begun commercial manufacturing, releasing 63.7 million doses.¹² This rapid response was possible because of decades of prior government investment in basic research on coronaviruses and molecular biology.

The Economic Rationale for Government Investment

Why does government funding of research generate such strong economic returns? Several factors contribute:

Addressing Market Failures

Private companies often underinvest in basic research because the benefits are uncertain and may not be captured by the investing firm. One recent review of econometric studies concluded that the average private rate of return to an innovation seems to be between 20 and 30 percent, while the social rate of return is closer to 50 percent.¹³

Complementarity with Private Investment

Rather than crowding out private R&D, government research investment complements and stimulates additional private sector spending. A $1.00 increase in publicly funded clinical research stimulates an additional $2.35 of industry research and development investment after 3 years.¹⁴

Long-term Perspective

Government can invest in research with longer time horizons than private companies typically accept, funding fundamental research that may take decades to yield commercial applications but generates enormous economic value when it does.

International Competition and Strategic Necessity

The economic imperative for government R&D investment is heightened by international competition. Since 1995, the global ranking of U.S. R&D investment as a percentage of its GDP slipped from 4th to 10th place, with the United States now lagging behind competitors such as South Korea, Taiwan, Japan, and Germany in R&D investments.¹⁵

China is closing the gap, with total Chinese annual R&D investment exceeding $500 billion as of 2019.¹⁶ This competition underscores the strategic importance of sustained US investment in research and development.

Policy Implications and the Path Forward

The evidence strongly supports continued and expanded government investment in scientific research as an economic growth strategy. As one policy analysis noted, “effectively, the science and innovation system is akin to having a machine where society can put in $1 and get back $5 or more.”¹⁷

However, realizing these returns requires sustained commitment. National investments in research and development as a percentage of discretionary public spending have fallen from a 17 percent high at the height of the space race in 1962 to about 9 percent today.¹⁸

Conclusion

The data is clear: government investment in scientific research generates substantial economic returns through direct GDP contributions, job creation, and stimulation of private sector R&D investment. With returns of 30-100% annually and multiplier effects that exceed other forms of government spending, science funding represents not just an investment in knowledge, but a proven strategy for long-term economic growth and competitiveness.

As the United States faces increasing global competition in innovation, the economic case for robust government research funding has never been stronger. These investments don’t just advance human knowledge—they drive the economic engine that powers American prosperity.

Endnotes

  1. Center for American Progress, “The High Return on Investment for Publicly Funded Research,” December 10, 2012.

  2. Science|Business Network, “R&D pays: Economists suggest 20% return on public investment for research and innovation,” 2017.

  3. Aspen Institute Economic Strategy Group, “Seven Recent Developments in US Science Funding,” January 23, 2025.

  4. National Science Foundation, “Federally Funded R&D Declines as a Share of GDP and Total R&D,” 2023.

  5. National Institutes of Health, “Spurring Economic Growth,” January 17, 2025.

  6. Ibid.

  7. Ibid.

  8. Deleidi, M., et al., “Measuring the macroeconomic responses to public investment in innovation: evidence from OECD countries,” Industrial and Corporate Change, January 29, 2024.

  9. International Monetary Fund, “Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections,” Technical Notes and Manuals 14/04, September 2014.

  10. Clinton White House Archives, “Supporting R&D to Promote Economic Growth,” Economic Report.

  11. Center for American Progress, “The High Return on Investment for Publicly Funded Research,” December 10, 2012.

  12. Aspen Institute Economic Strategy Group, “Seven Recent Developments in US Science Funding,” January 23, 2025.

  13. Clinton White House Archives, “Supporting R&D to Promote Economic Growth,” Economic Report.

  14. National Institutes of Health, “Spurring Economic Growth,” January 17, 2025.

  15. American Association for the Advancement of Science, “Increases in U.S. Federal R&D Needed in a Global Crisis,” 2021.

  16. Aspen Institute Economic Strategy Group, “Seven Recent Developments in US Science Funding,” January 23, 2025.

  17. Ibid.

  18. Center for American Progress, “The High Return on Investment for Publicly Funded Research,” December 10, 2012.

 

The Hidden Infrastructure of University Research: Why Overhead Matters

In the wake of recent attempts to slash university research overhead rates, it’s crucial we understand what’s actually at stake for American innovation. As someone who has navigated the complex landscape of research funding, I want to shed light on a system often misunderstood by those outside academia.

When the federal government awards a research grant, it doesn’t just fund scientists and equipment—it invests in an entire ecosystem that makes discovery possible. The “overhead” or Facilities and Administrative (F&A) costs aren’t a luxury or a slush fund; they’re the essential infrastructure that powers our nation’s research engine.

Think about what allows a researcher to focus on finding the next breakthrough cancer treatment instead of fixing the lab’s HVAC system or navigating complex regulations. It’s the building maintenance staff, compliance officers, grant administrators, IT security teams, and countless others whose salaries are partially covered by these indirect costs.

The reality is stark: when organizations receive a $1 million research grant, typically 25-33% goes to this invisible but vital infrastructure [1]. At research-intensive institutions, the actual cost of maintaining this ecosystem can reach 50-60% of direct research costs. These rates aren’t arbitrary—they’re meticulously documented, audited by federal agencies, and negotiated every few years based on real expenditures.

February’s proposal to slash these rates to a flat 15% sent shockwaves through the research community, prompting immediate legal challenges [2]. While proponents pointed to private foundations that pay lower overhead rates, this comparison overlooks a crucial fact: foundation grants represent a small fraction of research funding and are only sustainable because federal grants cover the baseline infrastructure costs [3].

Without adequate overhead support, universities face impossible choices: subsidize federal research from other sources (effectively forcing students to foot the bill through tuition), reduce their research footprint, or watch their facilities deteriorate. The hardest hit would be public universities and institutions without massive endowments—precisely the diverse institutions we need for a robust national research portfolio [3].

This isn’t about protecting bureaucracy; it’s about preserving America’s global leadership in science and innovation. The infrastructure that overhead rates support allows researchers to navigate increasingly complex compliance requirements, maintain cutting-edge facilities, and translate discoveries into real-world impact [4].

As we debate research funding policies, let’s remember that scientific discovery doesn’t happen in isolation. It requires an ecosystem of support that, while invisible to many, is absolutely essential to progress. The overhead rates that sustain this ecosystem aren’t just accounting figures—they’re investments in our collective future.

 

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How Overhead Rates Are Set on Government Grants to Universities

What Are Overhead Rates?

Overhead rates represent the “facilities and administrative” (F&A) costs of conducting research. While direct costs cover researcher salaries, equipment, and supplies, overhead costs fund the essential research infrastructure and operating expenses that support the research. These include state-of-the-art laboratories, data processing systems, security measures, regulatory compliance, maintenance staff, and other necessary support services.

How Overhead Rates Are Determined

The process for setting overhead rates involves these key steps:

  1. Regular Auditing Process: Every 2 to 4 years, either the Department of Defense Office of Naval Research or the Department of Health and Human Services comprehensively audits a university’s shared costs to determine the appropriate federal reimbursement rate.

  2. Negotiation: Each university negotiates its own overhead rate with the federal government. This includes separate rates for facilities and administration.

  3. Rate Calculation: The university aggregates all its F&A costs across hundreds or thousands of research projects. These total F&A costs are then divided by a subset of direct research costs to arrive at an F&A cost rate, which is then reviewed and approved by the government.

  4. Application to Grants: Once established, this rate is applied uniformly to each research grant as its direct funds are spent.

Factors Affecting Overhead Rates

Overhead rates vary between institutions because of several factors:

  1. Regional cost differences (urban versus rural locations)
  2. Construction and maintenance costs
  3. Utility expenses
  4. Administrative costs
  5. Age and condition of facilities and buildings
  6. Special requirements for certain types of research

For example, a biomedical research facility in an earthquake-prone urban area will have different F&A costs compared to an engineering research facility in a rural area.

Typical Overhead Rate Percentages

The average amount paid to universities for F&A expenses is approximately 25-33% of the total grant amount. Universities with medical centers tend to be closer to 33% because of the higher costs involved in medical research facilities.

The base rate for NIH grants averages about 52% of the modified total direct costs—meaning the agency pays a school $52,000 to cover overhead costs on a $100,000 research grant. However, universities usually don’t receive the entire 52% because some awards carry lower rates, and certain expenses don’t qualify.

Modified Total Direct Costs (MTDC)

It’s important to understand that the overhead rate is not applied to the total grant amount but rather to a subset called “modified total direct costs” (MTDC). Some direct research costs are excluded from this calculation, such as equipment, capital expenditures, patient care charges, rental costs, tuition remission, and scholarships/fellowships.

For example, if a university has a 50% F&A rate and receives a grant with $445,000 in direct costs (of which $365,000 qualifies as MTDC), the F&A reimbursement would be $182,500 (50% of $365,000). This would make the total grant $627,500, with F&A costs representing 29.08% of the total budget.

Recent Policy Changes

There have been significant recent developments regarding overhead rates:

In 2024, the Department of Energy announced that it was cutting university overhead rates to 15% on research grants. DOE said this would save $405 million in an annual external research grants budget of $2.5 billion.

The DOE justified this change by stating they wanted to “better balance the financial needs of grant recipients with the Department’s obligation to responsibly manage federal funds.” This standardized 15% rate applies to all grant awards to institutions of higher education.

Similarly, the NIH had previously announced a shift to a flat 15% rate from individualized institutional rates, claiming it would save $4 billion annually. However, a coalition of universities and state attorneys general sued, and a federal judge issued a permanent injunction against the change.

University Contribution to Research Costs

Universities do not profit from F&A recoveries. In fact, they are typically not fully reimbursed for all the expenses they incur to support federal research. According to data collected by the NSF, in FY23 universities contributed approximately $6.8 billion in facilities and administrative expenditures not reimbursed by the government.

This is partly due to an Office of Management and Budget (OMB) cap limiting the amount the government can repay universities for administrative and compliance-related expenses, including federal mandates. This cap has been in place since 1991 and has never increased.

Comparison with Other Research Performers

Studies suggest that proportionately, F&A expenses for university research are slightly less than those for other research performers. A study in 2000 by the RAND Corporation found universities had the lowest percentage of total research costs classified as F&A (31%). Federal laboratories were somewhat higher at 33%, and industrial laboratories were higher still at 36%.

Sources:

  • Association of American Universities (AAU). “Frequently Asked Questions about Facilities and Administrative (F&A) Costs of Federally Sponsored University Research”
  • Science. “NIH plan to reduce overhead payments draws fire”
  • Science. “Energy Department cuts university overhead rates to 15% on research grants”
  • Department of Energy. “Department of Energy Overhauls Policy for College and University Research, Saving $405 Million Annually for American Taxpayers”

Deep Dive: The Administrative Backbone of Research

Administrative costs make up approximately 40% of the total Facilities and Administrative (F&A) costs in university research overhead [5]. These costs are critical to supporting research activities, though determining which administrative expenses are properly attributable to research requires careful analysis and documentation.

Components of Administrative Costs

Administrative costs in the F&A structure typically include three main components:

  1. Departmental Administration (DA): This is the largest component, representing approximately 19% of the total F&A rate. It includes administrative and clerical salaries and expenses at the academic department level that support research [5].

  2. General Administration (GA): This covers university-wide administrative functions like the president’s office, accounting, human resources, and purchasing [5].

  3. Sponsored Programs Administration (SPA): This includes the offices that specifically manage research grants and contracts, ensuring compliance with sponsor requirements [5].

Determining Research Association

The process of determining which administrative costs are associated with research activities is complex and involves several methodologies:

Time and Effort Reporting

Government regulations recognize that faculty and departmental staff have research-related administrative responsibilities, and their salaries and related costs can be considered costs of research. Universities capture an estimate of the amount of time spent on administration related to research in academic departments [5].

This is typically done through:

  • Faculty activity reports
  • Time and effort certification
  • Administrative workload surveys

Space Surveys and Functional Usage

A space inventory and functional usage survey is a critical component of F&A rate proposal development. Universities conduct detailed surveys of how institutional space is used, which helps allocate costs appropriately between research, instruction, and other activities [6].

When administrative staff work in spaces dedicated to research support, their costs can be more clearly allocated to the research function.

Cost Pools and Allocation Bases

Universities gather administrative costs into “pools” and then distribute these costs to different functions (research, instruction, public service) using appropriate allocation bases. For example:

  • Administrative salaries might be allocated based on the proportion of total direct expenditures in each function
  • Central service costs might be allocated based on square footage or headcount

The Federal Cap on Administrative Costs

It’s important to note that there are specific federal limitations on administrative costs:

Since 1991, the amount universities can be reimbursed from the government for administrative costs has been capped by the Office of Management and Budget (OMB) at 26% of modified total direct costs. This cap only applies to higher education institutions [1].

This cap was implemented following some high-profile cases of perceived misuse of indirect cost funds in the early 1990s.

The Review and Audit Process

The association of administrative costs with research is rigorously reviewed during the F&A rate negotiation process:

Professional negotiators from the cognizant federal agency review grantee indirect cost rate proposals to ensure rates are both appropriate and compliant with grant terms and federal regulations [7].

This review includes:

  • Examination of audited financial statements
  • Review of treatment of fringe benefits
  • Verification of lobbying cost certification
  • Ensuring compliance with OMB Cost Principles [7]

Negotiators specifically identify and exclude any unallowable costs from the indirect cost pools, such as certain public relations expenses, debt costs, and contingencies [7].

Challenges in Administrative Cost Allocation

Several factors make administrative cost allocation particularly challenging:

  1. Joint Purpose Activities: Many administrative functions serve multiple purposes simultaneously (supporting both research and education).

  2. Increasing Compliance Burden: University support for research has grown 65% since 2010, due in part to rising compliance costs associated with increased federal research regulations in areas such as human subject protection, export control compliance, and ensuring research security and integrity [1].

  3. Inconsistent Treatment: Different federal agencies and private sponsors may have different perspectives on what constitutes a reasonable administrative cost associated with research.

The current debates about reducing overall F&A rates would significantly impact universities’ ability to maintain administrative infrastructure supporting research, potentially forcing difficult choices about which administrative services to maintain and which to reduce [4].

References

[1] Association of American Universities (AAU). “Frequently Asked Questions about Facilities and Administrative Costs of Federally Sponsored University Research.” https://www.aau.edu/key-issues/frequently-asked-questions-about-facilities-and-administrative-costs

[2] Science (AAAS). “Energy Department cuts university overhead rates to 15% on research grants.” https://www.science.org/content/article/energy-department-cuts-university-overhead-rates-to-15-on-research-grants

[3] Science (AAAS). “NIH plan to reduce overhead payments draws fire.” https://www.science.org/content/article/nih-plan-reduce-overhead-payments-draws-fire

[4] Delip Rao. “Understanding NIH’s 15% Overhead Cap.” https://deliprao.substack.com/p/understanding-nihs-15-overhead-cap

[5] Boston University Research Support. “Facilities and Administrative Costs and Analysis.” https://www.bu.edu/researchsupport/tools-services/facilities-administrative/

[6] University of Oregon Research and Innovation. “Understanding Facilities and Administrative (F&A) Costs.” https://research.uoregon.edu/manage/awards/understanding-facilities-administrative-fa-costs

[7] U.S. Department of Health and Human Services. “Indirect Cost Negotiations.” https://www.hhs.gov/about/agencies/asa/psc/indirect-cost-negotiations/index.html

[8] National Institutes of Health. “Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates.” https://grants.nih.gov/grants/guide/notice-files/NOT-OD-25-068.html

[9] AcademyHealth. “NIH abruptly slashing indirect grants. What this means for researchers.” https://academyhealth.org/blog/2025-02/academyhealth-situation-report-nih-abruptly-slashing-indirect-grants-what-means-researchers

[10] Office of the University of Utah. “Indirect Costs/Facilities and Administrative Costs (F&A).” https://osp.utah.edu/policies/handbook/budget-development/indirect-costs.php