In the context of current discussions about the government spending on R&D and more broadly on science, technology and innovation the key question should be how to use the public resources in the most efficient way. While the fact that markets do not provide sufficient incentives for individuals and firms to engage in socially optimal R&D and innovation is well established in theory and documented by existing empirical evidence (due to positive externalities private returns to R&D investment are lower than social returns), in some cases government action may not provide effectively appropriate incentives at sufficiently low administrative and compliance cost, and without creating further distortions (crowding out).
Given scarce public funds, assessing the efficiency and effectiveness of public spending on R&D and their determinants should be given a high attention in Ireland.
A recent study commissioned by the European Commission (“Efficiency of public spending in support of R&D activities”, by Michele Cincera, Dirk Czarnitzki, and Susanne Thorwarth, Economic Papers 376/2009, European Economy Series, European Commission) analyses the efficiency of public R&D expenditure with respect to fostering business R&D spending at the macroeconomic level in OECD countries over the past two decades (1980-2004). Two methods are used – the Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA) – to relate business enterprise R&D expenditure (BERD) and alternatively R&D personnel employed in the business sector to three public R&D funding inputs: government financed R&D in the business sector (BERDBYGOV), expenditures on higher education R&D (HERD) and R&D conducted in public labs (GOVERD). Both methods estimate efficiency frontier and efficiency losses.
The efficiency performance of public R&D varies across countries. In the case of business R&D expenditure, the countries ranked as the most efficient by both methods include (in alphabetical order): Australia, Canada, Finland, Germany, Japan, Netherlands, New Zealand, Singapore, Switzerland, and the United States. Using the DEA method the following countries are ranked as most efficient in the case of both outcomes (business R&D expenditure and R&D personnel in the business sector): Australia, Canada, Iceland, Ireland, Japan, New Zealand, Portugal, Singapore, Switzerland and the United States. The following countries are found highly efficient irrespectively of model specification or method used: Finland, Germany, the Netherlands, United States, Japan and Switzerland. Japan, Switzerland and the United States are ranked in the first position in each of the five periods.
The differences in efficiency performance have been explained by framework conditions such as the nature of competition, the quality of the business environment, the IPR regime, access to markets and external financial conditions, institutional factors influencing the effectiveness of public R&D with respect to fostering R&D activities in the business sector. In particular the strength of the IPR system and the legal structure and security of property rights appear to have affected positively efficiency levels.
The paper can be downloaded from here: