NASA Technological Spinoff Fables

by John Pike
25 May 1995

Many supporters of the space program have placed great stock in the benefits of technological spinoff from the space effort for the American economy. Proponents estimates of the rate of return from NASA spending range from $7 in return from every $1 of NASA spending (Lyttle, David, "Is Space Our Destiny?" Astronomy, February 1991, page 6) to $23 in return for every $1 of NASA spending (Chase Econometric Associates, "The Economic Impact of NASA R&D Spending," prepared under NASA contract NASW-2741, April 1976).

Popular citation of these figures to bolster support for NASA funding are quite misleading, since they overlook the methodology by which they were derived. It is popularly claimed that studies have "concluded" that NASA research produces an "above average" rate of return. The reality is that these studies have "assumed" that NASA research has an "average" return relative to other types of reasearch.

And a General Accounting Office review of NASA studies of economic benefits concluded that their results were (General Accounting Office, "NASA Report May Overstate The Economic Benefits Of Research and Development Spending," PAD-78-18, 18 October 1977):

"... not crucial to deciding whether more or less money should be spent on NASA R&D, because similar effects could be obtained by other forms of government spending -- such as defense procurement or energy R&D. Tax cuts are, of course, a comparable alternative..."

Spinoff proponents overlook the fundamental difference between private profit-seeking R&D and federal expenditures that are labeled R&D. A 20% return on investment is an equilibrium value for the typical rate of return currently required on commercial investments. Those R&D investments promising higher rates of return are funded, and those with lower rates of return are not funded. This is simply saying that an private commercial investor will seek about this rate of return.

This is not to say that any expenditure labeled "R&D" will provide this return. Commercial and government R&D have little in common beyond the fact that both are performed by scientists and engineers. Federal "R&D" expenditure levels are determined by a wide range of factors that seldom includes expected rate of return, and thus there is no basis for assuming that government research investments will realize a rate of return commensurate with private investments.

One could just as easily assume, absent evidence to the contrary, that NASA R&D has a rate of return of about zero, since otherwise the R&D would be conducted by the private sector. And there is little homogeneity in what is considered "R&D" by the government. NASA's "R&D" budget declined in the early 1980s when the Shuttle was declared "operational" by administrative fiat, but this had little impact on actual Shuttle program technology content.

The argument in favor of spinoffs is further flawed by its failure to distinguish the relative contributions of technology push and market pull in the transfer process. The implicit assumption of the spinoff advocates is that the primary bottle-neck to technical innovation is the absence of new technology, rather than the absence of a market. But in general, the range of technologies that are feasible from an engineering standpoint is much broader than the range of technologies that pass the test of marketing feasibility. One has only to look at the fates of quadrophonic sound systems, Betamax video cassets, and laser video-discs to understand that inadequate engineering ingenuity is not the main barrier to commercial success.

A closer examination of the spinoff record would provide little comfort for space advocates. One recent German analysis of space spinoffs concluded that (Schmoch, Ulrich, et al, "Analysis of Technical Spin-Off Effect of Space-Related R&D by Means of Patent Indicators," 41st Congress of the International Astronautical Federation, 6-12 October 1990, IAA-90-610.):

"The overall conclusion to be drawn from this is that the spin-off rate is very low in highly specialized space projects -- a conclusion which coincides with the finds of other investigations. The concept of a decisive spin-off in the narrow, real sense of the term cannot therefore be validated on the result of these findings... many standard examples of spin-offs may be traced back to the first R&D boom in the Sixties... only in the rarest of cases do the spin-offs prove to be identifiable as classic cases in which the source can be associated exclusively with space technology and the diffusion be associated with a sector unrelated to space technology. In the majority of cases, both source and diffusion can be associated with multiple purposes both within and outside space technology."

The most comprehensive recent review of the impact of NASA technology benefits to the commercial sector was conducted for NASA by the Chapman Research Group in 1989 (Chapman Research Group, An Exploration of Benefits From NASA "Spinoff", June 1989, under contract 88-01 with NERAC, Inc.). This study evaluated the benefits derived from technologies identified in the annual NASA report Spinoff during the period from 1978 through 1986.

Unlike the previous econometric studies which simply assumed that the activities NASA labels "research" have the same payoff as commercial research, this study actually sought to quantify the econcomic side-benefits of NASA activities.

A total of over $21 billion in sales and savings benefits were identified as resulting from NASA activities. However, the report conceded that only about $5 billion of this total was due to actual spinoff, that is "instances in which a product, process, or even an entire company would not have come into existence had it not been for the NASA furnished technology." Most notable among these is the $1.6 billion in medical instruments, frequently cited as a major NASA spinoff. The remaining $16 billion in benefits were in areas where "the NASA technology contributed to the sales, but that contribution can vary widely, from a relatively small percentage of the total sales or savings..." And in this area, additional sales of commercial aircraft accounted for over $10 billion.

The significance of these findings is best appreciated in the context of overall NASA spending during this period. The total NASA budget from 1978 through 1986 amounted to over $54 billion, of which about $2.5 billion was devoted to aeronautical research and development. NASA efforts in aeronautical research would seem to have been quite effective, with a $2.5 billion investment yielding $10 billion in benefits. Such a 4-to-1 payoff is not too surprising, given that work in this area is specifically targeted to improving commercial products.

But the fact that the total NASA investment of $55 billion yielded a paltry $5 billion in true spinoffs, creating entirely new products or industries, suggests a very poor return of ten cents on the dollar. Again, this should not be surprising, given the highly specialized nature of much of the engineering and development work conducted by NASA.

So rather than being an unusually good investment paying 7:1 or 22:1 for each dollar invested, NASA has an astoundingly bad 1:10 payoff -- about a factor of 100 worse than the commercial economy as a whole.