What is the return to publicly funded R&D in the business enterprise sector?

Expenditure on research and development (R&D) in Norway in 2018 was close to NOK 73 billion, which corresponds to 2.1 per cent of gross domestic product. If we look at R&D expenditure and the number of person-years by R&D personnel, 45 per cent of R&D work was carried out in the business enterprise sector and 55 per cent in the university, college and institute sectors.

Approximately 10 per cent of research in the business enterprise sector is funded by the public through the Research Council of Norway, Innovation Norway and the R&D tax deduction scheme SkatteFUNN. We are therefore talking about a significant share of public funding.

When the results of R&D are made public, it is easy for others to make use of the findings. This is good for society. On the other hand, when the return to R&D does not exclusively accrue to the firm that makes the R&D investment, we run the risk that socio-economically profitable research will not be initiated without public funding. Public funding of R&D is therefore good policy if the instruments can be set up efficiently.

But what is the return to publicly funded R&D in the business enterprise sector? And should the structure of public R&D support in Norway be changed? We address these questions in a new empirical research article published in the leading journal Research Policy. Our results indicate that it is possible to increase the return on public R&D investments.

Public support to incumbent firms that regularly perform R&D (R&D-incumbents) does not seem to generate additional output in terms of jobs, productivity or value creation. We find significant results among companies that have not previously conducted R&D (R&D-starters). However, R&D-starters receive a modest part of the total amount of support from the public policy instruments, approximately 30 per cent. Perhaps surprisingly, the share of support for R&D-starters is even lower for SkatteFUNN than for R&D support from the Research Council of Norway and Innovation Norway. This is related to the fact that SkatteFUNN is rights-based and therefore mostly benefit large, R&D-experienced firms.

The results indicate that public support schemes should to a much greater extent be aimed at R&D-starters in the business enterprise sector, and at the same time let the research among the well-established R&D firms be based on self-financing or other private funding. That is, unless one can establish a high likelihood of spill-over effects to third parties of the supported projects (e.g environmental benefits, or strong positive ripple effects to other companies).

A striking finding is that the major instruments for direct support in Norway do not generate more output (value added) or employment per NOK 1 million in support than do tax credits. The Research Council and Innovation Norway are therefore no better at "picking winners" than the rights-based scheme SkatteFUNN. When we include the significant costs associated with the administration and selection of projects by these policy instruments, it seems clear that it is more cost-effective to design support schemes based on general criteria instead of individuals’ discretion.

Based on our findings, we would therefore recommend the following when public R&D funds for business are to be distributed: (1) The support schemes should be aimed at young companies that are about to start with R&D investments. (2) For other purposes, such as support for regular R&D-performers, this should be provided when the project will have positive spill-over effects, i.e. when the findings may be beneficial to third parties. (3) General criteria should be used to a greater extent when allocating R&D support.

With this, society gets the highest return to the invested R&D funds.

This blog is based on the published article “Public R&D support and firm performance: A multivariate dose-response analysis» in Research Policy, Vol 49, Issue 7, September 2020. A Norwegian version of the blog was published as an opinion piece in the newspaper Dagens Næringsliv September 12^th 2020.