Growth through Research and Development - what does ... - Vinnova

4 The effect of publicly-funded R&Don private R&D4.1 Theoretical aspectsA central issue is to what extent publicly-funded R&D complements orsubstitutes private R&D. If public funding is only awarded to projects thatthe companies would have conducted in any case, then there is nojustification for public funding at all.David et al (2000) list a great number of conceivable positive and negativeeffects of State-funded R&D. The thinking behind the concept that publiclyfundedR&D should complement private R&D is partly that an increasedmarginal return (direct funding) or reduced marginal cost (tax incentives)for R&D will encourage the companies themselves to conduct more R&D.There are two positive long-term and dynamic effects of publicly-fundedR&D. First, it can increase the internal stock of scientific knowledge atcompanies or at other companies by means of spillovers. The companies canthen build on this stock of knowledge in their own R&D. Secondly, thecompany’s R&D personnel receive further education and training.There are additional positive effects. Public-funding can be used to meetfixed R&D costs for items (e.g. test facilities or permanent R&D equipment)that can then be used in the companies’ own R&D activities, thus reducingthe average costs for R&D. Even in the case of contract R&D (e.g. in thedefence industry), private R&D can be stimulated for several reasons. Fixedstart-up costs for R&D within a particular field can be covered, the ability toassimilate new technology increases within the company and public R&Dcontracts signal a future demand for products from the Government.There are, however, a number of central problems associated with publicfunding:• Publicly-funded R&D may crowd out private R&D by increasing thecosts for R&D. Goolsbee (1998) and David and Hall (1999) claim thatthe most important effect of public-funding is that it increases thesalaries of R&D personnel – at least in the short run. The companiesthen move their resources to other investments. Although the total suminvested in R&D may increase due to public funding, the real quantity ofR&D (adjusted for higher costs) may actually be lower.• Another argument is that publicly-funded R&D simply replacesprivately-funded R&D. The companies replace their own funding withpublic funding and continue to conduct R&D at the same level as21