Public spending on research and innovation pays off – but how much, and why? Economists struggle to find the answers.
Article by Richard L. Hudson, published in Science|Business on 31 August 2017
Why spend money on research? Léopold Demiddeleer, a Belgian technology executive, has a one-word answer: courage.
About 10 years ago his former employer, chemicals giant Solvay, was stepping up development of hydrogen fuel-cell technologies, a key to low-carbon cars. It needed someplace to demonstrate the technology, and Solvay’s big Antwerp chemical plant was a good candidate. But, as chief technology officer, how was he going to persuade the company to risk the money to refit the plant?
Enter the Flemish government, which agreed to a series of small investments. Inside Solvay, the public commitment switched the traffic lights to green. The specific amount was less important than the signal it sent, he recalls. “Even if it’s small, the leverage is important. You need a justification inside the company that you are not alone to think this way; so you need this external funding” to win the budget argument internally. “It takes a certain courage.”
Imparting courage – more commonly known in policy circles as a catalytic effect – is one of many justifications offered for increased public spending on research and innovation. In the Solvay case, the outcome was happy: The technology worked, and jobs were created in Belgium and Germany. But as public R&D budgets rise, the policy arguments behind it get ever-more complicated.
Counting the reasons
Some argue public largesse is needed for basic research – because companies won’t do it, and all the great technologies from the Internet to antibiotics have begun in publicly funded research. Others say more public money is needed to build networks – innovation ecosystems – through which ideas move from lab to market. Others argue for late-stage technology subsidies, such as Solvay-style demonstration projects. Strengthen universities to improve skills, say others. Invest in R&I to boost ‘capacities’ or jobs or economic growth. Raise budgets because wise, science-based policy improves society and reduces social tensions. Or, yet another: R&D creates knowledge, a public good.
The debate goes on – even as global spending on R&I rises, to $1.48 trillion in 2013, according to the latest UNESCO report. Is there any consensus among the experts about the returns it yields? Well, of a limited sort: “The broad consensus is that the returns are extremely difficult to measure,” says Luc Soete, a prominent economist and former rector at the University of Maastricht. That doesn’t mean the money is wasted; to the contrary. Instead, he says, it means that in the end a finance minister’s decision to boost R&D budgets comes down to politics. “Ultimately, it’s a political choice.”
And this is, certainly, a moment of political choice in Europe. Starting this autumn the European Union, under the Estonian Presidency, is stepping up debate on its next multi-year spending plans. Over the past decade, EU spending on R&I has nearly tripled, to €77 billion over the current seven-year plan. Many are pushing for a further rise from 2021 onwards – with one advisory group, chaired by former World Trade Organisation head Pascal Lamy, advocating another doubling of the budget. At the same time, however, EU member-states are wrestling with the rising costs of policies for migration, defence and terrorism. And other long-established programmes, in regional development and agriculture, need money, too.
In this kind of debate, there are no lack of studies in support of R&I. The most noteworthy, by US consultants Battelle Memorial Institute, found that for every dollar that the US government invested in the DNA-deciphering Human Genome Project of the 1990s, it generated a return of $141 to the US economy overall – in new products, services, jobs, tax revenues and other factors. Another study by the US National Institutes of Health claimed that medical research it funded over the years led to reductions in illness that saved the US economy $240 billion.
In the EU, economists have generally taken a more cautious line. One study, for the European Commission estimated that its €55 billion Framework Programme 7, from 2007 to 2013, generated €11 for every euro invested. A study for the UK Medical Research Council estimated an annual rate of return of 30% to 37% from biomedical research into cardiovascular and mental health. Several studies, by a range of economists, have estimated the annual rate of return from public R&I investment to be at least 20%. This figure, 20%, has become something of a benchmark in research economics – and, by comparison, investing in 10-year Eurozone government bonds produces a 3.1% annual return.
Whatever the number, “there is overwhelming evidence from multiple sources to justify research as one of the best investments that can be made with public (and private) funds,” said one paper (PDF, 467 KB), by University of Manchester Vice President Luke Gheorgiou.
The economic toolbox
So why all this confusion? One reason is the methodologies all differ: the economic literature in this field is a basket of apples, oranges, pears, and boysenberries. Also, Soete believes, many also suffer from being too conventional, economics-wise. They use the standard econometric toolbox of creating a computer model that takes input and output factors and tries to estimate the causal link – without certainty there really is a link. He advocates a ‘Big Data’ approach to look, without any preconceptions, for correlations between different variables – for instance, between the quality of a country’s universities and its technology exports.
Generally, many experts say, a bullet-proof justification for R&I investment may be impossible. There are too many interdependent, unmeasurable and strictly local factors involved. Just because Tallinn has become one of Europe’s digital capitals in one generation of trying, doesn’t mean that Bucharest, Johannesburg or Montevideo can do the same. As one study put it (PDF, 1820 KB), by the Dutch Bureau for Economic Policy Analysis: “Our findings suggest that spending on public R&D does not yield an automatic return. The return seems to be dependent on the national context, in which institutions and government policies play an important role.”
So what are those institutions and policies that matter? There is, experts say, no ‘secret sauce.’ But there are some basic cooking tips.
Tips for success?
First tip is that the quality of science and education in a country matters a great deal. Those countries with highly ranked, prize-winning universities and labs tend to have more economic activity in technology; the UK, Sweden, Denmark, Finland, the Netherlands, Belgium and Germany always top international rankings. Another tip is that a substantial public investment in basic research is vital – but there isn’t any hard evidence about how much is enough.
A third tip is that openness – in science, markets and society – often seems to go with productive tech sectors (though not always, as China’s rise suggests). And a related point: the quality and size of innovation networks – linking big and small companies, universities and labs, government agencies and citizens – matters greatly.
But the most important tip comes back to politics. “Politics are the sine qua non for successful explanations of national innovation rates,” argues one American researcher, Mark Zachary Taylor, in a recent book. Those countries concerned about their place in the world, and willing to invest in improving it, eventually do better.
Demiddeleer, now a technology consultant, agrees: Public R&D investment is a form of “insurance on the future. Do you want to master this future, or not? If not, OK, leave it to the Chinese.”