STUART KENNEDY
May 31, 2017

The negative effect of Govt R&D

Research

The negative effect of Govt R&D

Roy Green: Government needs to think where it spends its research dollars 

Government research and development spending gets trumped by academic R&D when it comes to positive economic spill-over effects on business R&D, a new study has revealed.

Academic R&D expenditure has positive spill-over effects on company-level R&D expenditure, whereas government expenditure at both local and federal levels has negative effects.

These are rather interesting findings, and will be looked at closely by a government that is scrutinising value-for-money issues in relation to public R&D investment.

The study, titled ‘The role of spill-overs in research and development expenditure in Australian industries’ also found the long assumed idea that geography plays a part in promoting spill-over effects is true, and that clustering has a positive effect on encouraging RE&D investment.

It was co-authored by Sasan Bakhtiari from the Industry department’s Office of the Chief Economist and Robert Breunig from the ANU’s Crawford School of Public Policy.

The spill-over effects studied in the report tend to happen in three different way. There are knowledge spill-overs, market spill-overs, and network spill-overs.

“All three types of spill-overs create a gap between the private rate of return to R&D and the social rate of return which includes benefits to both other firms and consumers,” the report says and the effects can be either positive or negative.

Knowledge spill-overs can complement or substitute for a firm’s own R&D activity and could also influence the R&D activity of any type of firm be they competitors, clients, or suppliers.

The discovery that government R&D spending has a negative impact on the firms surrounding the government activity is likely to be the most contentious finding in the report.

“Academic R&D expenditure has positive spill-over effects on firm-level R&D expenditure whereas government expenditure at both local and federal levels has negative effects,” the report said.

Government R&D activity appears to smother private firm spending on R&D, but the report could not single out a reason for this phenomena.

“This could be due to academic R&D being more focused on basic research than government R&D or could be the result of some difference in how the R&D expenditure actually spills over into firms. We cannot distinguish between these two possibilities,” the report said.

Roy Green, an innovation system expert and the Dean of the UTS Business School in Sydney described the study as ‘rigorous’ and said it tested out the idea that firms engaged in R&D positively influenced businesses around them.

“They’ve done a very rigorous exercise using the database of the firms that are the recipients of the R&D Tax Incentive scheme to test a theory,” Professor Green said.

“The theory is that public support for R&D will not just have benefits that are privatised for the firm but will have spill-over benefits for other firms and institutions that broadens the impact of the public support and possibly increases its quality,” he said.

“The main point is that this is a graphic illustration of the theory and evidence of research and innovation spill-over effects across most developed countries.”

The report suggests that removing government R&D efforts from government institutions and placing them inside higher education could boost R&D expenditure in surrounding businesses.

“These results suggest that shifting expenditure from government R&D to academic R&D might bring positive effects for firm-level R&D expenditure. It also suggests that a shift by government agencies towards more basic research could be rewarding,” the report said.

Professor Green believes the strong endorsement in the report of academic R&D as a driver of positive spill-over effects helps make a case for more collaboration between academia and innovative private firms.

“The interesting thing in relation to this paper is that it might be saying that if you provide funding to private institutions you should also make sure that also in appropriate cases requires them to collaborate with an academic institution. That was one of the issues raised in the enquiry into the R&D tax incentive.

“Why not require private firms – not in all circumstances – to have a collaboration with an academic institution in order that they get greater value for money from a public grant, if it is true that funnelling money through academic institutions enhances the spill-over effects,” he said.

Geography is important in how the R&D spill-over effect plays out. The report found it was positive for clients and peers of firms that engaged in R&D but not so suppliers.

“For clients and peers, we find a positive effect of spill-overs on firm-level R&D expenditure if firms are located near each other. We find this effect when we use radii of 25 or 50 km,” the report said.

It also found clustering had benefits for R&D expenditure, although it seems to be a result of increased competition rather than better collaboration by cluster participants.

“This effect could be a consequence of more intensive competition or alternatively a result of building collaborations within clusters,” the report said.

“We tested for the latter effect by interacting clustering with peers and local peers but we find no significant extra effect on local spillovers from higher levels of clustering. The competition effect seems to be the dominating factor,” the report said.

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