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If national security and national economic competitiveness are driven by new technology than the U.S. is at risk of falling behind. That’s according to the newest data analysis from Govini. It found that federal spending on a range of technologies is up but in certain domains of research and development, it’s not keeping up with, say, China. The Federal Drive with Tom Temin got more from Govini CEO Tara Murphy Dougherty.

Interview transcript:

Tom Temin: Ms. Dougherty, good to have you back.

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Tara Murphy Dougherty: Thanks, Tom. It’s great to be here.

Tom Temin: And tell us what the study was about. You have identified through a taxonomy various areas of spending. What were you looking at here specifically?

Tara Murphy Dougherty: Absolutely. This is actually a really, really exciting and unique analysis. So what Govini did is we took from our data 14 different technology areas that were identified by the undersecretary of Defense for Research and Engineering. And we dove into those and developed a taxonomy around 11 specific technology areas derived from that original list, along with subsegments, and then subsegments beneath that, that get really, really granular. What the taxonomy shows for all of these different technology areas is US federal spending over a five-year time period.

Tom Temin: All right, and looking at the 14 areas, with the exception of space, which is kind of surprising, spending did go up. Tell us the top line findings here.

Tara Murphy Dougherty: Spending for the technologies covered in a taxonomy from fiscal year 2017 to fiscal year 2021 nearly doubled, so that overall investment in these critical technologies went from about $60 billion to about $117 billion. So significant increases as you mentioned, Tom. When you start to look at the details and you really dive into where the increases lie, the vast majority of the rise over that time period falls within the biotechnology sector. And if you pull the onion back even farther, then you see it’s really related to COVID response spending.

Tom Temin: Got it. So yeah, if you back out COVID response spending, then the spending overall on the other 13 areas is just going up roughly at the rate that the federal budget is going up, then?

Tara Murphy Dougherty: Exactly. That’s exactly right. And the reason I mentioned the technology list that was put out by the Department of Defense from which we derived our taxonomy is because that means these are just a list of technologies that Govini thinks are important. These are the technologies that the United States National Security Leadership has said are vital to American competitiveness. So I think what’s important is to be able to do exactly that kind of analysis that you’re doing off the top of your head, which is let’s control for things that are happening in the world that might be creating spikes, and look at the overall trend as it relates to that competitiveness dynamic.

Tom Temin: Sure, the black swan ate the clam of artificial intelligence, or something that I make a ridiculous joke here. But my question is, what is the nature of the spending? Is it grants to academia on these technologies? Is it contracts, is it SBIR development? I mean, what form does the spending generally take?

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Tara Murphy Dougherty: So the spending analysis covers all of the standard FAR activities that we see with big contracts coming out of the federal government, as well as those non-FAR transactions, some of which you mentioned. So this analysis looks at other transaction authorities otherwise known as OTAs, grants and all of the different mechanisms like SBIRs and STTRs. What we have found is that in places such as directed energy, you see a very small portion of overall spending being put through non-FAR based contracts, meaning the vast majority of effort in area as emergent as directed energy is still going through big traditional contracts. There might be nothing wrong with that, but it’s a really, really unique type of visibility in terms of characteristics of the spending and looking at, not just okay, what are we spending, but how and then that leads you naturally to the really important question of with whom?

Tom Temin: Right, well with whom is important, but also the fact that it’s FAR based because by the same token, every person in the military with stars or scrambled eggs on their hat says the same thing. And that is the procurement system is stifling the innovation, stifling the speed of deployment of new technologies. But yet the majority of spending you point out is in fact through FAR based standard contracting.

Tara Murphy Dougherty: That’s exactly right. And I have to say, as the CEO of a venture capital-backed business that does work with the federal government and the Department of Defense, as we sit here in the final days of the fiscal year, boy is the procurement system challenging. And it’s complicated, not just on the executive branch side, but by the fact that we spend half the year with continuing resolutions. The whole thing is a nightmare, to be honest. And so yes, I think it’s important for defense leaders to look at their portfolios and for those responsible for areas of emerging technology, where they’re trying to attract companies that otherwise have plenty to gain from working just with the commercial sector and get them invested in national security problems, they need to understand that breakdown of not just how much are we doing today in a non-FAR-based mechanism, but what’s the maximum we can do? Because any flexibility is going to help drive innovation at this point.

Tom Temin: We’re speaking with Tara Murphy Douhgerty, the CEO of Govini. So one interpretation could be that the same spending could have more effect, if it was through more effective mechanisms of say, getting over what they call the valley of death for technology.

Tara Murphy Dougherty: One of the pieces of good news we saw in the analysis is if you look at the transition over time of not just places of performance of the work, which largely correlates to defense or federal installations, but you look at the headquarters locations of companies that are working with the federal government in these technology areas, and there’s been a real shift over this five-year period from concentration in the National Capital Region, and a few areas like big defense bases, or national labs, to a real strong alignment between American tech hubs, and where we see companies working with the federal government to be headquartered. So the penetration is happening. That said, the number of new defense entrants into – new entrants into the defense market is actually declining. So there’s something going on here that shows we’re still not getting the outcomes that we want, despite the fact that the number of activities, innovation centers, incubators, and certainly the amount of money being spent by the federal government in order to attract these innovative companies is just, it’s rising but is it getting the right results?

Tom Temin: And then sometimes there’s a sort of paroxysm of spending, as we are likely to get soon with that CHIPS bill, which has grown from $50 billion to almost $300 billion for Lord knows what. But there are provisions in there, for example, that even the president himself said this, if you build a fab, you got to do it with union labor. And yet some of the very senators voting for the say fabs are way more expensive to build in the United States. So the government fuels the cost. And you wonder what that type of spending will accomplish either, that kind of mass spending on a profitable industry that began here in the United States.

Tara Murphy Dougherty: Absolutely, and yet hasn’t seen much investment over the past five years, according to our analysis. So this national security scorecard that we’re talking about today, Tom, was just featured at the Aspen Security Forum just last week, and there was a really interesting discussion among leaders, including leadership from Intel about this exact dynamic. And the cost that is going to be associated with reshoring, nearshoring, friend shoring, or whatever you want to call implementation of the CHIPS Act, an increasing domestic fabrication of semiconductors, that is going to drive costs up. And that might be exactly the right response from an American national security perspective. But we better have an integrated economic plan to address it.

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Tom Temin: All right. And a couple of other details I wanted to ask you about before we close here. One, space spending, when we have a new Space Command, Space Force, and there’s this huge burgeoning space industry without government subsidy. It gets government contracts to do launches in some cases. But in many cases, it’s simply for the purposes of commercial space needs. So talk about the space spending that you saw by the government.

Tara Murphy Dougherty: So the space segment within this taxonomy and analysis is the single segment where spending didn’t really rise over the time period. It was essentially flat, which in my mind makes it the single best example out of these emerging technology areas of just how big the gap can be between rhetoric and reality, certainly over the past five, six years, including from the previous administration, but for many others, the discussion around American investment in space has been bullish. And yet the money hasn’t followed. Now, that might not be because of a lack of intent, or the funding might still be coming. And it’s in the out years, there are certain major programs that ended but notably, there’s also this intertwining with the commercial activity that you’re talking about. And I think that the analysis shows that actually, prices are going down in a positive way because of an increase in commercial competition in some of these areas. I’ll just make one last point on the Space segment because it is such an interesting analysis. We saw an 8.5% decrease in the launch vehicle subsegment within the overall space technology segment that we analyze. And that’s a really good example of where we likely see the shift because of increased reliance on commercial space as opposed to the old way of doing things.

Tom Temin: Yes, interesting you should mention that. I just spoke recently with Steven Meier. He’s the director of the Naval Center for Space Technology. And he pointed out, let’s see if I can find this here. Yeah, the cost to get a kilogram in space has gone down from $10,000 a kilogram to $100, to orders of magnitude, thanks to Commercial Investments. So there’s hope there. And finally, quantum computing investment. That seems to be an area where we are going one way and China is going the other way.

Tara Murphy Dougherty: Absolutely. And so that highlights the difference between what the United States is doing relative to our competitors, we saw about a 12% increase over the time period for spending on quantum science. But the total real dollar value of that five years worth of spending is still only $1.7 billion as a portion of the American R&D budget or even just the Defense Department budget alone. That’s minuscule. And so is it enough? Hard to say. Is it keeping pace with what China’s spending on quantum? Certainly not. And that’s what I think Defense leaders and national security leaders across federal government need to grapple with.

Tom Temin: Tara Murphy Dougherty is the CEO of Govini. Hey, thanks so much for joining me.

Tara Murphy Dougherty: Thanks for having me, Tom.

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