The UK R&D performance and the role of policy

1. The UK R&D performance and the role of policy Helen Miller Institute for Fiscal Studies Public Economics Lectures February 2008

2. Plan for the lecture • Motivation • UK Productivity gap • UK R&D performance • Industry structure • Increased geographical mobility of innovative activity • Role of policy • challenges for policy

3. The productivity gap Labour productivity • Output/input • Scale output by: • workers • hours worked - most common measure of productivity • Comparisons across countries and across time

4. The Productivity Gap Labour productivity Source: Office for National Statistics, International Comparisons of Productivity, year 2005

5. The Productivity Gap Labour productivity Source: Office for National Statistics, International Comparisons of Productivity, year 2005

6. The Productivity Gap Labour productivity Source: Office for National Statistics, International Comparisons of Productivity, year 2005

7. The Productivity Gap Labour productivity Source: Office for National Statistics, International Comparisons of Productivity, year 2005

8. The Productivity Gap Labour productivity Source: Office for National Statistics, International Comparisons of Productivity, year 2005

9. The Productivity Gap GDP per hour worked, in 1990 $ Source:

10. The Productivity Gap GDP per hour worked, in 1990 $ Source:

11. The Productivity Gap GDP per hour worked, in 1990 $ Source:

12. The Productivity Gap GDP per hour worked, in 1990 $ Source:

13. What determines Productivity? • R&D and innovation • creation of new knowledge and technologies • diffusion and adoption of existing technologies • has been shown to be important • Others • human capital • investment climate • competition, regulatory regime • infrastructure • etc

14. UK R&D performanceGross expenditure on R&D as a % of GDP Source: Main Science and Technology Indicators, OECD 2006

15. UK R&D performanceGross expenditure on R&D as a % of GDP Source: Main Science and Technology Indicators, OECD 2006

16. UK R&D performanceGross expenditure on R&D as a % of GDP Source: Main Science and Technology Indicators, OECD 2006

17. UK R&D performanceGross expenditure on R&D as a % of GDP Source: Main Science and Technology Indicators, OECD 2006

18. UK R&D performanceGross expenditure on R&D as a % of GDP Source: Main Science and Technology Indicators, OECD 2006

19. Components of UK gross expenditure on R&D (2005) R&D performed by: Government Higher education Business enterprises

20. Components of UK gross expenditure on R&D • Higher education – UK performing relatively well • world publications & citations • PhD per capita / per unit of higher education spending • Business - steady decline • increase in real terms but decrease in intensity • lowest level in G5

21. Figure 3: Business Expenditure on R&D as a percentage of GDP

22. Figure 3: Business Expenditure on R&D as a percentage of GDP

23. Figure 3: Business Expenditure on R&D as a percentage of GDP (BERD intensity) in G5 countries

24. Figure 3: Business Expenditure on R&D as a percentage of GDP (BERD intensity) in G5 countries

25. Other measures of innovative activity • Other measures paint a similar picture • researchers in business enterprise • patents taken out at both the EPO and USPTO • consider growth over the past two and a half decades - all measures show a similar picture • the UK is below the both the US and the OECD and EU-15 averages

26. Industry Mix • Decline in R&D intensity • however, economy changes structurally over time (preferences / industrial composition) • move towards less R&D intensive industries (services)? • Can decompose change over time in the UK intensity of business R&D expenditure into two effects • change in performance of UK industries (‘within effect’) • change in composition of UK industries (‘between effect’)

27. Industry Mix Total: total change on R&D intensity Within: part of the total that is result of industries doing less R&D Between: change in the share of R&D intensive industries in value added

28. Industry Mix Total: total change on R&D intensity Within: part of the total that is result of industries doing less R&D Between: change in the share of R&D intensive industries in value added

29. Industry Mix • early 1990s - within – manufacturing industries doing less • end 1990s -between - R&D intensive industries account for smaller • share of value added

30. Location of innovation • Firms have conducted an increasingly proportion of their innovative activity abroad • Location of innovative activity changes in two directions • Firms locating their activity offshore • Foreign firms locating in a country • Important in the UK

31. Location of innovation • Aggregate data – location of ‘world’ R&D • Only see overall change in location • Would like a clearer picture at the firm level of where firms are locating their innovative activities • Use patents data • Rich firm level details • Not perfect

33. Applicant firm

34. Inventor location

35. Accounts data Applicant firm Parent firm Patents data Patents data Applicant firm Inventor location • Recover a mapping between the parent firm and the location of innovative activity • Look at the share of innovative activity • -based in a country that is owned by a foreign company • -owned by UK companies and based abroad

36. Share of innovative in the UK attributable to a foreign firm (2000/04)

37. Share of innovative in the UK attributable to a foreign firm (2000/04)

38. Share of UK firms’ innovative activity based offshore (2000/04)

39. UK pharmaceuticals industry • Important UK industry • Has become more internationalised • US – host for much activity • changed over time • during 1990s – activity increasingly taking place in US, proportion of activity in the UK falling • late 1990s – falling share in the US and increasing share in the UK • Other countries’ firms – French / German

40. Why are firms locating abroad? • Access to larger markets • Technology sourcing • Ongoing work to understand the factors that determine firms’ location choices

41. Summary so far.. • UK R&D intensity has been declining • driven by business • Industrial structure • Move away from manufacturing • Innovative activity locating offshore • impact for UK – losing spillovers? • Sub optimal?

42. Government support of R&D • Why is there a role for policy? • market failures • Does the market create sufficient incentives for individuals and firms to engage in the socially optimal amount of innovation and technology transfer? • If not, can government intervention effectively provide the appropriate incentives at sufficiently low administrative and compliance cost, and without creating further distortions?

43. ‘Spillovers’ justification • Total benefits of new knowledge may not be captured by the innovator • Knowledge is non-rival • In the absence of perfect intellectual property rights, knowledge is partially non-excludable • Private returns to innovation are lower than social returns • The market will not provide the socially optimal level of innovation

44. Implications for government policy • Evidence supports some kind of subsidy to R&D as externalities appear to be substantial Griliches (1998) concludes from the literature that • “R&D spillovers are present, their magnitude may be quite large, and social rates of return remain significantly above private rates” • R&D tax credit • Deduct >100% R&D expenditure from profit when calculating tax liability • Now considerations of global nature of R&D • Tax competition Vs cooperation

45. Conclusions • UK has experienced relatively poor productivity performance • UK firms have underperformed in R&D • Part of that is a change in recent periods may be a shift toward less R&D intensive industries • Changing location of R&D • Can justify a role for policy but there remain questions as to how it should respond to globally mobile R&D

46. Questions?

47. REFERENCES • The UK productivity gap • Crafts, N. and O’Mahony, M. (2001), “A perspective on UK productivity performance”, Fiscal Studies, 22 (3), pp 271-306 • R. Griffith, R. Harrison, J. Haskel and M. Sako, The UK Productivity Gap and the Importance of the Service Sectors, IFS Briefing Note no. 42, 2003 (http://www.ifs.org.uk/publications.php?publication_id=1790) • The UK R&D performance • R. Griffith and R. Harrison, Understanding the UK’s Poor Technological Performance, IFS Briefing Note no. 37, June 2003 (www.ifs.org.uk/corpact/bn37.pdf) • R. Griffith, Technology, Productivity & Public Policy, Fiscal Studies, 28(3) • Private and social returns to R&D • Griliches (1998), “The Search for R&D spillovers”, Chapter 11 in R&D and productivity: the econometric evidence, Zvi Griliches, University of Chicago Press, 1998 • Griffith, R., S. Redding and J. Van Reenen (2001a), “Mapping the two faces of R&D: Productivity growth in a panel of OECD industries”, Institute for Fiscal Studies Working Paper W00/02 • (http://www.ifs.org.uk/publications.php?publication_id=2051) • R&D tax credits • Bloom, N, R. Griffith and J. Van Reenen (2002), “Do R&D tax credits work: evidence from a panel of coutries 1979-97”, Journal of Public Economics 85, pp 1-31 • Griffith, R., S. Redding and J. Van Reenen (2001b), “Measuring the cost-effectivenes of an R&D tax credit for the UK”, Fiscal Studies, 22(3), pp 375-399