Incentivising Private Sector Investment in R&D

The original version of this post appeared on the British Ecological Society’s Ecology and Policy Blog

As a whole, UK businesses invest less in research and development than their major international competitors, and there is more that the Government can do to address this disparity. That was the message from Beck Smith, Assistant Director of the Campaign for Science and Engineering (CaSE), addressing yesterday’s meeting of the Policy Lunchbox network. Beck provided a fascinating overview of an area of policy that members of the Biochemical Society and British Ecological Society (partners in organising Policy Lunchbox) may know little about but, Beck made clear, should familiarise ourselves with given the vital importance of support from business to the health of the science base in the UK.

The previous Labour Government stated its aim to increase the overall investment in research and development (R&D) from all sources to 2.5% of GDP by 2014, although the current Government doesn’t intend to adopt national targets. In any case, at present, we stand at just 1.8% of GDP being invested; indicating the significant distance that remains for us to catch up with other ‘G7’ countries. Given that the UK Government is committed to tackling the budget deficit and therefore tightening spending, the importance of leveraging other sources for investment in R&D is clear. At the moment, however, the UK is third from bottom amongst the G7 group (ahead of Canada, just, and Italy) in terms of business spend on R&D. In 2009, the 1000 UK companies that invested the most in R&D spent a total of £25.3bn, down 0.6% on the previous year. So what can the Government do to address this potential downward trend?

First, Beck stressed, we need to understand why business and industry aren’t investing as much in R&D in the UK as it could do. Beck outlined research suggesting that one way this can be explained is as a combination of three factors, which collectively can be called ‘market failure’:

1. ‘Spillover rationale’: the suggestion that innovators find it difficult to appropriate all returns from their innovations. For example, the inventor of the first personal computer will have seen others move in to develop this technology and will now occupy a crowded space. This disincentiveses innovation. The Government can address this through means that allow companies to keep more of the benefits of their investments, for example through tax breaks such as the R&D tax credit.

2. Coordination failure: broadly speaking, difficulties encountered by groups of individuals or firms in acting collectively. There may be a failure of businesses to network sufficiently with organisations conducting research (or vice versa) that may be of benefit to them. This could be alleviated by the facilitation of partnerships between industry and universities.

3. Information failure: Differences in the information available to both parties prevent transactions from taking place. This argument suggests, for example, that businesses seeking financial support or partners for R&D projects simply don’t know where to find the necessary information to do so.

Beck suggested that there are a number of levers that Government could use to address these market failures – thereby encouraging greater support from business and industry for science in the UK – through focusing on the following areas:

1. Skills: Universities report that many students entering courses from A-levels require remedial lessons in, for example, mathematics and experimental design, in order to perform. Furthermore, industries have complained that they need to give new graduates from universities additional training before they are competent in their jobs. There have also been reports from industry surveys that there are a shortage of graduates in science, technology, engineering and maths (STEM) to fill posts. Alongside addressing school and university tuition there therefore appears a need to raise the profile of careers in science amongst young people (such as through the STEM Ambassadors programme).

Recent amendments to immigration requirements in the UK may also have sent a negative message to qualified STEM graduates from overseas – those who may be considering further study and research in the UK – regarding the UK’s reputation as a good place to pursue a scientific career. Although the Government has taken steps to address these issues for STEM graduates, these negative perceptions may take some time to dispel.

2. Financial environment: tax-breaks such as the ‘patent box’ (a corporation tax cut of 10% on all profits attributed to patents) could create a favourable environment for companies to invest in R&D. Beck also highlighted the positive role that ‘challenge prizes’, such as the $10 billion Ansari X Prize, can play in incentivising investment and scientific progress. Since the launch of the X Prize, to reward the development of the first viable craft for unmanned space flight, it is estimated that there has been an additional $100 billion of investment in this area of study.

3. Knowledge flow: the Government could amend the Research Excellence Framework, for example to make it easier for universities to employ those who have worked in industry. When budgets are cut within industry, Beck suggested, one of the first areas of investment to be cut is the travel and meetings budget. Employees therefore decrease their network at a time when this needs to be expanding. Facilitating the flow of information between researchers in academia and in industry can help to address this.

4. A long-term, cross-party strategy for science in the UK would also be very welcome.

Beck highlighted recent developments from Government which have gone some way to address the points raised. For example, an annual £250,000 prize fund has been announced (orders of magnitude less than the X Prize but nonetheless a step in the right direction), whilst the Government is pressing ahead with plans for research hubs to link business and academia (so called ‘Catapult Centres’, previously known as ‘Technology Innovation Centres’) to aid commercialisation. However, there are convincing arguments for the state to do much more; such as those recently presented in a work by Mariana Mazzucato called ‘The Entrepreneurial State’.

Speaking about the publication on yesterday’s Today Programme, in the document and online, Ms Mazzucato argues for public policy to be bold and courageous, stepping in to fund areas that the private sector has no interest in, as well as putting in place mechanisms to reap greater returns for itself for doing so. As an example, the United States supported the development of the internet by pouring huge amounts of money into the Defence Advanced Research Projects Agency (DARPA), which undertook a significant amount of the research underpinning the formation of what is now known as Silicon Valley. The private sector, Mariana suggests, has a reputation of coming into areas of research 15–20 years after a large amount of state investment. It cannot therefore be seen as the answer to addressing deficits in state funding for science and innovation (although it is clearly complementary); the Government must find innovative ways of funding large-scale investment in the science base in this country if we want to see the emergence of another Google in the UK, for example.

Policy Lunchbox is a network for Policy Officers and others working in learned societies and the third sector. It is run jointly by the British Ecological Society and Biochemical Society. See our webpage for details of forthcoming events. The next event will be on how to get the most from party conferences.

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