» California concentrates one-quarter of US business research
23.06.2016 - Natural Sciences Sector

California concentrates one-quarter of US business research

Reception area at Riverbed Technology, an IT firm in Silicon Valley

In June 2016, the State Finance Department confirmed that California had overtaken France to become the world’s sixth biggest economy. With a population of 39 million, California is home to just 12% of the US population. The Californian economy grew by 4.1% in 2015, twice as fast as the USA as a whole (1).

According to the UNESCO Science Report: towards 2030, released in November last year, more than one-quarter of business research and development (R&D) was concentrated in the State of California (28.1%) in 2012. California is streets ahead of its nearest rivals for this indicator: Massachusetts (5.7%), New Jersey (5.6%), Washington State (5.5%), Michigan (5.4%), Texas (5.2%), Illinois (4.8%), New York (3.6%) and Pennsylvania (3.5%).

California has the country’s fifth-highest research intensity (4.39% of GDP) after New Mexico, Maryland, Massachusetts and Washington and before Michigan. Taken together, these six states account for 42% of all R&D performed in the USA. New Mexico’s high research intensity can be explained by the fact that it hosts the Los Alamos National Laboratory and one can speculate that Maryland’s position reflects the concentration of federally funded research institutions there. Washington State has a high concentration of high-tech firms like Microsoft, Amazon and Boeing and the engineering functions of most automobile manufacturers are located in the State of Michigan.

California is home to Silicon Valley, the name given to the area hosting the leading corporations (Apple, Google, Intel, Microsoft, etc.) and start-ups in information technology. The state also hosts dynamic biotechnology clusters in the San Francisco Bay Area, Los Angeles and San Diego. The main biotechnology clusters outside California are the cities of Boston/Cambridge, Massachusetts, Maryland, suburban Washington DC, New York, Seattle, Philadelphia and Chicago.

California has the seventh-highest share of occupations in science and engineering (5.4%). Nationwide, it even supplies the greatest number of employees in these fields: 13.7% of the total. This high share reflects a potent combination of academic excellence and a strong business focus on R&D: the prestigious Stanford University and University of California rub shoulders with Silicon Valley, for instance. In much the same way, Route 128 around Boston in the State of Massachusetts is not only home to numerous high-tech firms and corporations but also hosts the renowned Harvard University and Massachusetts Institute of Technology.

California home to some of the world’s top corporations for research funding

Microsoft, Intel and Google figured among the world’s top 10 corporations for research spending in 2014. They shared this distinction with Johnson & Johnson, a multinational based in New Jersey which makes pharmaceutical and healthcare products, as well as medical devices, and were closely followed by automobile giant General Motors (11th), based in Detroit, and pharmaceutical companies Merck (12th) and Pfizer (15th). Merck is headquartered in New Jersey and Pfizer in New York. Intel’s investment in R&D has more than doubled in the past 10 years, whereas Pfizer’s investment is down from US$ 9.1 billion in 2012.

It is hardly surprising that several pharmaceutical companies figure among the top 15 corporations for research spending. The USA carries out almost half (46%) of all research in the life sciences, making it the world leader. In 2013, US pharmaceutical companies spent US$ 40 billion on R&D inside the USA and nearly another US$ 11 billion on R&D abroad. Some 7% of the companies on Thomson Reuters’ Top 100 Global Innovators list for 2014 are active in life science industries, equal to the number of businesses in consumer products and telecommunications.

Amgen (38th) is based in California. This pharmaceutical company developed the cancer drug Neupogen, which boosts the patient’s white blood cells to ward off infection. The Biologics Price Competition and Innovation Act was passed in 2010 to contain costs for highly priced pharmaceuticals like Neupogen by creating a pathway for abbreviated licensure for biological products shown to be ‘biosimilar’ to an approved product. The act was inspired by the fact that the patents for many biologic drugs will expire in the next decade. The first biosimilar approved in the USA by the Food and Drug Administration is a biosimilar of Neupogen called Zarxio, which is made by Sandoz. In September 2015, a US court ruled that Amgen could not block Zarxio from being sold in the USA. Neupogen costs about US$ 3 000 per chemotherapy cycle; Zarxio hit the US market on 3 September at a 15% discount.

Some of the most innovative technology is coming out of Silicon Valley. Amazon has developed services like Pantry to meet consumer needs in almost real time. A recently introduced pilot allows a user to re-order a household consumable by pressing a physical button. Facebook is developing virtual reality technology based on its acquisition of Oculus Rift, an approach that will integrate people into the digital environment, rather than the other way round. The small sensors that facilitate this connectivity are also being applied in industry and health care. New enterprises are also experimenting with the use of data from personal activity trackers to manage chronic diseases like diabetes. Google, meanwhile, has acquired several products at the interface of computation and the physical world, including autonomous thermostats, and has developed the first operating system specifically for such low-power devices. Perhaps the most ambitious project of all is Google’s self-driving car, which is scheduled for commercial release in the next five years.

In July 2015, Google was one of 13 US corporations which committed to investing US$ 140 billion in low carbon emission projects, as part of the American Business Act on Climate Pledge announced by the White House. Already the world leader for the purchase of renewable energy to run its data centres, Google pledged to triple its purchases of renewable energy over the next decade. Three months earlier, the state governor had imposed a 40% carbon emissions reduction target by 2030 over 1990 levels for California.

Patent trolls: a nightmare for Silicon Valley

The proliferation of ‘patent trolls’ has become a nightmare for high-tech companies and start-ups in Silicon Valley, in particular. This term is widely used to designate firms that are formally called patent assertion entities. These firms make no products themselves but rather focus on buying dormant patents from other firms, often at a low price. Ideally, the patent they purchase is broad and vague. The troll then threatens high-tech firms with litigation for infringing its patent, unless the firm agrees to pay a prohibitively expensive licensing fee. Even if the firm is confident that it has not infringed the patent, it will often prefer to pay the licensing fee rather than risk litigation, as cases can take years to settle in court and entail hefty legal costs. The niche is so lucrative that the number of patent trolls has grown exponentially in the USA: in 2012, 62% of patent litigation was brought by patent trolls, according to a paper by Chien (2013) filed in the Santa Clara Law Digital Commons.

A decision by the US Supreme Court on 29 April 2014 sets out to discourage frivolous lawsuits. It brings litigation closer to the English rule of ‘loser pays,’ whereby the unsuccessful litigant is forced to bear the legal costs of both parties – which may explain why patent trolls are much less common in the UK. In August 2014, US judges cited the Supreme Court judgment in their decision on an appeal filed by Google against patent assertion entity Vringo, which was claiming hundreds of millions of US dollars. The judges ruled against Vringo on the grounds that neither of its two patents was valid.

Research hotspots are a common phenomenon

California is not unique in concentrating such a large share of the USA’s research activity. The State of São Paulo is home to 22% of Brazilians but generates about 32% of GDP and a similar share of the nation’s industrial output; it also accounts for 73% of public expenditure on R&D. The Ile de France region encompassing the capital is a research hotspot in France, as is the city of Shanghai in China or Gauteng Province in South Africa. In the Russian Federation, roughly 60% of researchers work in Moscow, the Moscow Region or St Petersburg.

(1) Philippe Escande (2016) Quand la Californie dépasse la France. Le Monde, 20 June.

Source: UNESCO Science Report: towards 2030, see the chapter on the USA

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