OECD countries react differently to changes in the business cycle regarding their expenditure on research and development (R&D). Countries tend to noticeably increase their budgets for R&D when there is an economic upturn, while public R&D spending remains almost constant on average across all countries when there is a downturn in economic growth.

Innovation leaders such as Germany, Sweden or Finland increase their public R&D expenditures counter-cyclically in recessions.
Weak innovators such as Portugal, Spain and most EU countries in Eastern Europe cut their public R&D budgets during recessions.

However, a closer look reveals that, especially during recessions, there are systematic differences between countries depending on their innovative strength. While innovation leaders such as Germany, Sweden or Finland increase their public R&D expenditures counter-cyclically in recessions and thus improve their resilience to economic crises, weak innovators such as Portugal, Spain and most EU countries in Eastern Europe cut their public R&D budgets. This contributes to a further widening of the innovation gap between countries, as a recent study by ZEW Mannheim suggests. For the study, the researchers analysed public R&D expenditures of 28 OECD countries from 1995 to 2017.

Innovative strength determines spending policy

In times of economic crisis, most countries are faced with a decline in business R&D spending. “At least in part, the public sector should compensate for lower corporate R&D investment by increasing public R&D spending. Economically, this makes a lot of sense, because research and development are the key drivers of economic growth,” emphasises ZEW researcher Professor Bettina Peters. At the same time, many countries are cutting back on spending due to falling tax revenues in the crisis. “However, public R&D spending should not be determined by a country’s financial strength, but should aim to improve its innovative capacity,” explains Peters. “Our results show that the different reactions of strong and weak innovators do not depend on their debt level. Rather, it reveals the importance these countries attach to innovation. Japan and Belgium, both countries with high debt levels, were good examples of this during the 2009 financial crisis. Despite high debt levels, they increased public R&D spending,” says the ZEW researcher.

With their public R&D expenditures, the countries finance both primarily application-oriented R&D activities in private companies and basic research in public research institutions and universities. Even in recessions, this funding portfolio hardly changes. “Only countries with weak innovation performance shift their R&D spending away from public institutions to private companies in recessions in order to partially make up for the lost private R&D spending,” explains Professor Maikel Pellens, ZEW Research Associate and co-author of the study.

Date

06.04.2021

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R&D

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