What Are the Benefits of Government Investment in Research and Development? - “R&D Expenditures Are Important Drivers of Economic Development”

As a key foundation for innovation, R&D is crucial to a nation’s economic strength. Accordingly, governments are typically willing to invest in R&D – but only when public coffers are flush. Between 2005 and 2013, the German government increased overall investment in R&D by 60 per cent to its current level of some 14.4 billion euros. By contrast, falling R&D investment has been witnessed in the European countries strongly impacted by the sovereign debt crisis. ZEW’s Georg Licht, an expert in industrial economics, explains why government investment in R&D is essential – in both good times and bad.

Dr. Georg Licht is the head of the Research Department “Industrial Economics and International Management” at ZEW. He specialises in research on innovation and start-up activities. On 5 March 2015 he will moderate a panel discussion in Brussels as part of the ZEW Lunch Debates series on the topic of public sector R&D budgets during time of crisis.

Under what conditions is public sector investment in R&D advisable?

R&D doesn’t just benefit the firm undertaking research, but other firms as well.  Government subsidies for R&D reduce the costs of research and thus stimulate corporate R&D spending. In this way, governments can help to compensate for inadequate corporate R&D investment below the socially optimal level. At the same time, the public sector can conduct R&D at its own institutions and make the results available to all firms. This is especially important in instances when the public sector is the major consumer of the products generated by R&D – as is the case in the defence and health care sectors – and when the need for major research equipment such as particle accelerators, research vessels, or large telescopes exceeds the financial capacity of single enterprises or private individuals.

What are the particular problems facing government-sponsored R&D compared to private sector investment?

Government funding of R&D covers a wide range of research areas, from space and health care research to fundamental research on new product technologies or linguistics. Its impact is hard to measure, making it difficult to answer the question of how much the government should spend in each area. Of course, it is always important to ensure that government expenditure does not suppress private investment.

Can public investment stimulate economic growth?

R&D expenditure is an important driver of productivity and, by extension, of economic growth. This is true of R&D investment by private companies as well as by the public sector. Accordingly, the public sector R&D cuts that have been witnessed in the crisis-ridden eurozone nations have negative effects on their growth potential.

In nations such as Greece, Ireland, Spain, Italy, and Portugal, the European debt crisis has led to cutbacks in government R&D spending.

Indeed, these countries have drastically cut public R&D expenditure in recent years. Between 2009 and 2013, government R&D budgets in these nations shrunk by an average of 15 per cent, while during the same period, budgetary expenditures for R&D in Germany rose by 16 per cent. Government budgets have been thrown out of balance by falling tax revenues and rising costs of unemployment coverage in countries affected by the crisis, and are under considerable pressure. R&D budgets have not escaped the mounting push to reduce spending, and cuts have particularly affected discretionary spending not subject to contract or law. Moreover, cuts are encouraged by the impression that R&D can be easily postponed, since its productivity effects are only achieved over the medium term. This is especially true for government-funded basic research.

What incentives need to be provided at the European level to encourage EU Member States to devote more money to R&D?

First of all, Member States need to take action themselves, as they are responsible for the vast majority of public research funding in the EU – despite the large EU Research Framework Programme “Horizon 2020” and the R&D-related portions of the European Structural and Regional Funds. However, the EU could help encourage Member States to alter their spending priorities. One incentive we could think of is the co-financing for national research programmes within the Joint Programming Initiative, which the European Commission launched in 2008 with the aim of taking full advantage of public sector R&D potential throughout Europe.