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Impact of Economic Crisis on
Public R&D
Georg Licht & Markus Nisch
Center for European Economic Research (ZEW)
Mannheim, Germany
International Scientific Forum VUZF University
Innovation: Engine for Economic Growth
October 1, 2013, Sofia
Agenda

Motivation

Public and private R&D as Drivers of Growth

R&D Investments over the Business Cycle

Current Economic Crisis and R&D Investments

Summary and Conclusions
Introduction & Motivation

Barcelona 3%-objective
[2/3 by business sector; 1/3 by public sector]

Crisis hit the incentives and the ability of firms to
invest into R&D

Fiscal consolidation: Two-faced
Simulating growth vs. limits growth-promoting
investment;
R&D, Growth, Productivity - Literature

R&D, Growth, and Productivity
 Theory: Romer 1986; Grossman/Helpman 1991; Aghion/Howitt
1998; etc.
 Empirical Evidence: Coe/Helpman 1995; Griliches 1998; etc.

Social Returns to R&D >> Private Returns to R&D
 Country level: Nadiri und Kim (1996); Park (1995, 2004); etc.
 Industry level: Griliches (1973); Goto und Suzuki (1979);
Bernstein (1998); Mamuneas (1999); etc.
 Firm level: Jaffe (1986), Harhoff (2000), Rouvinen (2002); etc.

Public R&D as Driver of Productivity
 Salter / Martin (2001)
R&D over the Business Cycle

PRIVATE R&D:




Expected returns -> Crises increase uncertainty -> Lower
expected demand -> Downward pressure on R&D
Financial constraints becomes more severe: Cash flow limits;
availability of bank loans reduce
However: (Opportunity) cost of doing R&D decrease
PUBLIC R&D:


Opportunity cost of R&D spending increase due to the impact
of crises on the demand for other government intervention: e.g.
counter-cyclical demand side policies, unemployment benefits,
etc.
Lower tax income
Average growth rates of GBOARD
(2008-2012; %)
< -10
0.1 to 4.9
-10 to -5
5 to 10
-4.9 to 0
> 10
FI
SE
EE
LV
DK
IE
UK
NL
BE DE
PL
CZ
AT
SI
FR
SK
HU
RO
IT
BG
PT
ES
GR
Growth of R&D
in Central
Government’s Budget
• North-South Gap
in R&D becomes larger
during the current
economic and financial
crisis
• Additional public R&D
spendings increase in
first year of the crises but
in later phases public
R&D growth declines or
even becomes negative
Finland
Sweden
Denmark
Germany
Austria
France
Slovenia
Belgium
Netherlands
UK
Ireland
Estonia
Czech R.
Luxembourg
Portugal
Spain
Italy
Hungary
Poland
Slovak R.
Greece
Private R&D, Public
R&D, and
R&D Intensity
in 2010
• Public R&D is more
important for countries
with a low R&D intensity
BERD
HERD
• North-South decline in
R&D intensities
GOVERD
• BERD, HERD, GOVERD
in % of GDP
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0
Source: OECD-MSTI 2013-1
Measuring Public Funds for R&D
at the Country Level

GBOARD = Government Appropriations or Outlays
for R&D comprise all the budget items involving
R&D and measuring or estimating their R&D
content (Includes central government only)

Public R&D spending =
+ Business Enterprise R&D (BERD) financed by
Government
+ Higher Education R&D (HERD) excluding HERD financed
by the private sector
+ Government Intramural R&D (GOVERD) excluding
GOVERD financed by the private sector
Source: OECD-MSTI 2013-1
Private R&D Expenditures and Public R&D Budgets
- GBOARD Inflation Adjusted Growth rates BERD
Growth rates BERD
Growth rates
GBOARD
Growth rates BERD
Growth rates GBOARD
Growth rates GBOARD
Growth rates BERD
Growth rates GBOARD
Growth Rate of Private and Public R&D by Period
BERD growth rates
97-98
99-00
01-03
04-07
08-10
GBOARD growth rates
11-12
97-98
99-00
01-03
04-07
08-10
11-12
Southern Europe
4,9%
5,7%
4,2%
8,6%
1,7%
-1,0%
5,7%
9,4%
5,2%
3,5%
-0,1%
-8,6%
Central Europe
3,4%
6,6%
1,8%
2,4%
2,1%
4,3%
-1,3%
2,5%
2,0%
-0,5%
5,2%
0,8%
Western Europe
2,9%
5,2%
1,2%
2,4%
-1,0%
-0,8%
-2,1%
6,2%
6,2%
-0,3%
-1,8%
-5,0%
Scandinavia
7,7% 11,2%
1,5%
1,9%
1,1%
1,9%
-1,9%
1,9%
4,7%
1,9%
5,3%
-1,3%
Eastern Europe
6,1%
-0,4%
0,2%
9,4%
6,2% 16,4%
3,8%
2,3%
1,5%
7,0%
1,3%
0,4%
USA
6,6%
7,2%
-1,9%
4,3%
-0,3%
-0,4%
1,7%
4,6%
8,6%
2,3%
0,2%
-4,8%
Japan
3,3%
2,0%
4,1%
4,8%
-3,9%
3,3%
3,5%
5,7%
4,5%
0,2%
1,5%
2,5%
12,6%
9,2%
7,3%
8,8%
6,2%
Korea
-4,3% 12,6%
7,5% 10,2%
6,6% 12,7%
Germany
4,3%
7,3%
2,0%
2,6%
2,2%
5,8%
-2,5%
0,0%
1,5%
1,7%
6,3%
1,1%
France
1,1%
4,3%
1,8%
1,6%
2,8%
2,2%
-1,9%
4,0%
2,5%
-4,6%
4,4%
1,0%
Italy
0,9%
3,7%
0,3%
5,7%
3,0%
-0,1%
2,3%
8,7%
2,0%
0,5%
-2,1%
-7,4%
12,4%
8,3%
9,5% 10,7%
-0,9%
-3,1%
13,0%
9,8% 11,0%
6,1%
Spain
Source: OECD-MSTI 2013-1; EUROSTAT
0,2% -15,2%
Growth Rate of Private and Public R&D by Period
BERD growth rates
97-98
99-00
01-03
04-07
08-10
GBOARD growth rates
11-12
97-98
99-00
01-03
04-07
08-10
11-12
Southern Europe
4,9%
5,7%
4,2%
8,6%
1,7%
-1,0%
5,7%
9,4%
5,2%
3,5%
-0,1%
-8,6%
Central Europe
3,4%
6,6%
1,8%
2,4%
2,1%
4,3%
-1,3%
2,5%
2,0%
-0,5%
5,2%
0,8%
Western Europe
2,9%
5,2%
1,2%
2,4%
-1,0%
-0,8%
-2,1%
6,2%
6,2%
-0,3%
-1,8%
-5,0%
Scandinavia
7,7% 11,2%
1,5%
1,9%
1,1%
1,9%
-1,9%
1,9%
4,7%
1,9%
5,3%
-1,3%
Eastern Europe
6,1%
-0,4%
0,2%
9,4%
6,2% 16,4%
3,8%
2,3%
1,5%
7,0%
1,3%
0,4%
USA
6,6%
7,2%
-1,9%
4,3%
-0,3%
-0,4%
1,7%
4,6%
8,6%
2,3%
0,2%
-4,8%
Japan
3,3%
2,0%
4,1%
4,8%
-3,9%
3,3%
3,5%
5,7%
4,5%
0,2%
1,5%
2,5%
12,6%
9,2%
7,3%
8,8%
6,2%
Korea
-4,3% 12,6%
7,5% 10,2%
6,6% 12,7%
Germany
4,3%
7,3%
2,0%
2,6%
2,2%
5,8%
-2,5%
0,0%
1,5%
1,7%
6,3%
1,1%
France
1,1%
4,3%
1,8%
1,6%
2,8%
2,2%
-1,9%
4,0%
2,5%
-4,6%
4,4%
1,0%
Italy
0,9%
3,7%
0,3%
5,7%
3,0%
-0,1%
2,3%
8,7%
2,0%
0,5%
-2,1%
-7,4%
12,4%
8,3%
9,5% 10,7%
-0,9%
-3,1%
13,0%
9,8% 11,0%
6,1%
Spain
Source: OECD-MSTI 2013-1; EUROSTAT
Counter-cyclical
government policy
0,2% -15,2%
Growth Rate of Private and Public R&D by Period
BERD growth rates
97-98
99-00
01-03
04-07
08-10
GBOARD growth rates
11-12
97-98
99-00
01-03
04-07
08-10
11-12
Southern Europe
4,9%
5,7%
4,2%
8,6%
1,7%
-1,0%
5,7%
9,4%
5,2%
3,5%
-0,1%
-8,6%
Central Europe
3,4%
6,6%
1,8%
2,4%
2,1%
4,3%
-1,3%
2,5%
2,0%
-0,5%
5,2%
0,8%
Western Europe
2,9%
5,2%
1,2%
2,4%
-1,0%
-0,8%
-2,1%
6,2%
6,2%
-0,3%
-1,8%
-5,0%
Scandinavia
7,7% 11,2%
1,5%
1,9%
1,1%
1,9%
-1,9%
1,9%
4,7%
1,9%
5,3%
-1,3%
Eastern Europe
6,1%
-0,4%
0,2%
9,4%
6,2% 16,4%
3,8%
2,3%
1,5%
7,0%
1,3%
0,4%
USA
6,6%
7,2%
-1,9%
4,3%
-0,3%
-0,4%
1,7%
4,6%
8,6%
2,3%
0,2%
-4,8%
Japan
3,3%
2,0%
4,1%
4,8%
-3,9%
3,3%
3,5%
5,7%
4,5%
0,2%
1,5%
2,5%
12,6%
9,2%
7,3%
8,8%
6,2%
Korea
-4,3% 12,6%
7,5% 10,2%
6,6% 12,7%
Germany
4,3%
7,3%
2,0%
2,6%
2,2%
5,8%
-2,5%
0,0%
1,5%
1,7%
6,3%
1,1%
France
1,1%
4,3%
1,8%
1,6%
2,8%
2,2%
-1,9%
4,0%
2,5%
-4,6%
4,4%
1,0%
Italy
0,9%
3,7%
0,3%
5,7%
3,0%
-0,1%
2,3%
8,7%
2,0%
0,5%
-2,1%
-7,4%
12,4%
8,3%
9,5% 10,7%
-0,9%
-3,1%
13,0%
9,8% 11,0%
6,1%
Spain
Source: OECD-MSTI 2013-1; EUROSTAT
0,2% -15,2%
Pro-cyclical government
policy
Growth of Public R&D Budgets
and Government Budget Deficits
Growth of Public R&D Budgets
and Government Debt Level
Empirical Approach

24 EU member states (EU-27 excluding Romania, Luxemburg, Malta)

Panel data at country level;
Unbalanced panel covering the period 1981-2012

Arellano Bond Estimator

Three different models: BERD, GBOARD, PubR&D
normalised by GDP to account for size of countries

Specification:
R&Dit = f ( R&Dit-1 , GDPit-1, Interestit, Government budget
defizitit-1, Government debt levelit-1) + vi + eit
Drivers of Public and Private R&D Investments
- Summary of Panel Regression Results R&D Spending for
Universities,
Public R&D
Public Research
Private R&D
/ GDP
Institutes, and
/ GDP
(Budget
R&D Subsidies to
Figures)
Private Sector /
GDP
Lagged endo. variable
+
+
+
GDP
+
+
+
Long-term interest rate
-
-
Government net lending / GDP
-
-
Government debt / GDP
-
Summary and Conclusions

Public and private R&D per GDP is positively related to
GDP -> R&D spending move pro-cyclically

Government debt level and Government Deficits limits
investment government into R&D

Surprisingly, interest rates influence government R&D
spending but no impact on private R&D

Fiscal consolidation might have a positive effect on
public R&D investment in the medium-term and in the
long-run; Short impact of budget deficits depend on
how governments approach fiscal consolidation; History
however shows that public R&D has to contribute to the
reduction of government benefits
Thank You For Your Attention
Georg Licht
Center for European Economic Research
ZEW, Mannheim, Germany
[email protected]
www.zew.de
Co: Science Metrix
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