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Agenda

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

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Agenda

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  1. Impact ofEconomicCrisis on Public R&DGeorg Licht & Markus NischCenter for European Economic Research (ZEW)Mannheim, Germany International Scientific Forum VUZF UniversityInnovation: Engine forEconomic GrowthOctober 1, 2013, Sofia

  2. 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

  3. 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;

  4. 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. • Industrylevel: 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)

  5. 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

  6. Growth of R&D in Central Government’s Budget • North-South Gap in R&D becomes larger duringthecurrenteconomicandfinancialcrisis • Additional public R&D spendingsincrease in firstyearofthecrises but in laterphasespublic R&D growthdeclinesorevenbecomes negative

  7. Private R&D, Public R&D, and R&D Intensity in 2010 • Public R&D ismoreimportantfor countries with a low R&D intensity • North-South decline in R&D intensities • BERD, HERD, GOVERD in % of GDP Source: OECD-MSTI 2013-1

  8. Measuring Public Funds for R&D at the Country Level • GBOARD = GovernmentAppropriationsorOutlaysfor 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) financedbyGovernment • Higher Education R&D (HERD) excluding HERD financedbythe private sector • Government Intramural R&D (GOVERD) excluding GOVERD financedbythe private sector Source: OECD-MSTI 2013-1

  9. Private R&D Expendituresand Public R&D Budgets- GBOARD Inflation Adjusted - Growth rates BERD Growth rates BERD Growth rates GBOARD Growth rates GBOARD Growth rates BERD Growth rates BERD Growth rates GBOARD Growth rates GBOARD

  10. Growth Rate of Private and Public R&D byPeriod Source: OECD-MSTI 2013-1; EUROSTAT

  11. Growth Rate of Private and Public R&D byPeriod Counter-cyclicalgovernmentpolicy Source: OECD-MSTI 2013-1; EUROSTAT

  12. Growth Rate of Private and Public R&D byPeriod Pro-cyclicalgovernmentpolicy Source: OECD-MSTI 2013-1; EUROSTAT

  13. Growth of Public R&D Budgets andGovernment Budget Deficits

  14. Growth of Public R&D Budgets andGovernmentDebt Level

  15. 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&Dnormalised 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

  16. Drivers of Public and Private R&D Investments - Summary of Panel Regression Results -

  17. Summary and Conclusions • Public and private R&D per GDP is positively related to GDP -> R&D spending move pro-cyclically; Reaction of Government R&D to GDP change is smaller than the reaction of private sector • Government debt level and Government Deficits limits investment government into R&D • Surprisingly, interest rates influence government R&D spending but have no impact on private R&D • HENCE: Fiscal consolidation might have a positive effect on public R&D investment in the medium-term and in the long-run; The short-run 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

  18. Thank You For Your Attention Georg Licht licht@zew.deCenter for European Economic Research www.zew.deZEW, Mannheim, Germany Co: Science Metrix

  19. Selected References Aghion, P. and Howitt, P. (1998) Endogenous Growth Theory. Cambridge, MA: MIT Press. Aghion, P., Askenazy, P., Berman, N., Cette, G. and Eymard, L. (2012) Credit constraints and the cyclicality of R&D investment: Evidence from France. Journal of the European Economic Association 10: 1001-1024. Barlevy, G. (2007), On the cyclicality of R&D, American Economic Review 97, 1131–64. Coad, A. and Rao, R. (2010) Firm growth and R&D expenditure. Economics of Innovation and New Technology 19: 127-145. Coe, D.T. and Helpman, E. (1995) International R&D spillovers. European Economic Review 39: 859-887. Comin, D. and Gertler, M. (2006) Medium-term business cycles. American Economic Review 96: 523-551. Czarnitzki, D. and Licht, G. (2006) Additionality of public R&D grants in a transition economy, Economics of Transition 14: 101-131. David, P.A., Hall, B.H. and Toole, A.A. (2000) Is public R&D a complement or substitute for private R&D? A review of the econometric evidence. Research Policy 29: 497-529. Geroski, P.A. and Walters, C.F. (1995) Innovative activity over the business cycle. Economic Journal 105: 916-928. González, X., Jaumandreu, J. and Pazó, C. (2005) Barriers to innovation and subsidy effectiveness. RAND Journal of Economics 36: 930-950. Griffith, R., Redding, S. and Van Reenen, J. (2004) Mapping the two faces of R&D: Productivity growth in a panel of OECD industries. Review of Economics and Statistics 86: 883-895. Griliches, Z. (1998) R&D and Productivity: The Econometric Evidence. Chicago: University of Chicago Press. Guellec, D. and Van Pottelsberghe de la Potterie, B. (2001) R&D and productivity growth: Panel data analysis of 16 OECD countries. OECD Economic Studies 33: 103-127. Hall, B.H., Mairesse, J. and Mohnen, P. (2010) Measuring the returns to R&D. In Hall, B.H. and Rosenberg, N. (Eds.) Handbook of the Economics of Innovation. Elsevier-North Holland. Jones, C. (1995) R&D Based Models of Economic Growth, Journal of Political Economy 103, 759-784. Link, A.N. and J.T. Scott (2011). Public Goods, Public Gains: Calculating the Social Benefits of Public R&D, New York: Oxford University Press. Ouyang, M. (2011) On the cyclicality of R&D. Review of Economics and Statistics 93: 542-553. Rafferty, M.C. (2003) Do business cycles influence long-run growth? The effect of aggregate demand on firm-financed R&D expenditures. Eastern Economic Journal 29: 607-618. Romer, P.M. (1986) Increasing returns and long-run growth. Journal of Political Economy 94: 1002-1037. Salter, A. and B. Martin (2001). The economic benefits of publicly funded basic research: a critical review, Research Policy 30, 509–532

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