Chris Dimos (CGR&IS) and Jose Argudo (Innovate UK)
At times of tight public budgets, it is necessary to evaluate the effectiveness of public R&D support. Public funds must be spent in a way that creates additional economic benefits, which would not be otherwise realised. If not, there is an opportunity cost since public funding could be allocated to other public spending priorities (such as health and education).
Both Innovate UK and researchers from the University of Bath are currently working on a project to evaluate the effectiveness of R&D support programmes. The main focus of the project is to better understand how public R&D policies support firms to realise their innovation potential and hitherto invest more in R&D in line with the UK’s Industrial Strategy.
Of particular importance is to identify the types of firms that demonstrate the most sustainable and positive changes in their innovation activities. These types of firms hold the key to future dynamic growth in the UK economy. The project also seeks to identify highly ambitious yet credit constrained firms, for which we need to better understand their behaviour in order to provide public support that best matches their needs.
The project will attempt to not only inform the effectiveness of current practices but also provide recommendations on how policies can deliver a better future for innovation in the UK. This is especially salient, given the recent UK Industrial Strategy with the aim of boosting UK R&D expenditure closer to the OECD average (2.4% of GDP) by 2027.
In meeting this objective, Innovate UK will play a key role, by working with people, companies and partner organisations to find and drive the Science and Technology innovations to grow the UK economy. Indeed, over the last decade, Innovate UK has invested approximately £2.5 billion in business across the country, which has been matched by £1.8 billion from industry sources.
But why does the public sector intervene in free markets and co-finances private R&D when this is meant to be the very job of the private sector? The rationale for state intervention reflects the importance of R&D for innovation which in itself drives productivity and hitherto economic growth and prosperity. However, private firms are often hesitant to invest in R&D due to its intangible, uncertain and public good characteristics. Firms cannot use R&D as a collateral when seeking financing, unsuccessful R&D entails large sunk costs and other firms may imitate and gain benefits with little or no effort.
Evaluations of the effectiveness of R&D programmes are usually conducted on the basis of the additional investment in R&D. Innovation outcomes are typically the new products or production processes of private firms receiving support. For example, the additional product innovations a firm has managed to develop due to public R&D support is seen as a measure of the policy's effectiveness. Indeed, did you know that some of the major technological advances have been financed by public investment in R&D – to put it plainly, taxpayers’ money? Take for example, GPS devices, mobile phone touchscreens or even baby food (Ella's Kitchen). All of these innovations are a result of public funding of private R&D. Although, the private sector may appropriate the returns of such publicly funded innovations, these can contribute to fostering productivity, growth and ultimately living standards.
However, beyond affecting the research inputs and innovation outputs of firms, public R&D support may also affect the innovation behaviour of firms and managers. For example, companies may change their research strategy to meet new challenges and become more risk tolerant and engage in riskier R&D. Furthermore, small firms may formalise their R&D processes and allocate dedicated human resources to R&D activities. Such behavioural changes may have permanent positive effects on R&D which can yield innovation in a more sustained fashion. Further, the receipt of public support may serve as a “quality stamp” and endorse recipient firms’ R&D activities, facilitate access to capital markets and enable collaborations with suppliers, customers and other partners.
Did you find this interesting, do you want to know more about the topic or do you have any particular views around public support for R&D and Innovation? If you have any comments, suggestions or simply would like to get in touch with us please feel free to contact us at C.Dimos@bath.ac.uk.