The changing rationale for public funding

1. The changing rationale for public funding Aldo Geuna SPRU-University of Sussex & Politecnico di Torino DIMETIC, PECS, JULY 2007

2. Content • Traditional rationale: Post-WWII approach. • Changing characteristics of university research. • New rationale: Contractual-oriented approach. • Unintended consequences.

3. Post-WWII Rationale

4. The post-1945 rationale • Public good • Linear process • Budgetary expansion • Academic quality increasing with funding • Ex-ante judgement of research promises • Evaluation by academic community

5. Market-failure - Public good • Nelson (1959) and Arrow (1962) laid foundations of economics of science • Emphasised certain characteristics of scientific knowledge as a public good: • non-rival – others can use the knowledge without detracting from the knowledge of the producers • non-excludable – other firms cannot be stopped from using the information MORE • expansibility- The possibilities of multiple transfers make it possible to distribute information very widely without loss. => • Non-appropriable at least completely (see patents).

6. Market-failure - Public good • Also long timescale of basic research while firms usually have short-term investment perspective • Private benefits less than social benefits • Social benefits also wider than private benefits • Firms would not have invested in research on e.g. smoking-cancer link, ozone hole, global warming • Firms therefore tend to under-invest in research (less than socially optimal – free riding)

7. Market-failure - Public good • To raise research funding to socially optimum level, government needs to invest • Main product from govt-funded research = economically useful information, freely available to all • By increasing funds for basic research, govt can expand the pool of economically useful information • This information published – assumed to be durable and costless to use • Close connection between university teaching and research means universities also produce graduates with up-to-date knowledge and skills

8. Linear model • Scientific discoveries in early 20th Century & WW2  belief in linear model of innovation • Basic research  App. res.  Devlpt  Innovation • Government responsibility = to fund basic research – will eventually  wealth, health & nat. security • Contract not very explicit re exact form of benefits nor when • Used to justify substantial increases in gov’t funding • Viewed as investment in future welfare

9. V Bush ‘Social Contract’: The endless frontier • Science also seen as inherently unpredictable (‘serendipity’), ex-ante judgment. • Scientists in best position to judge which research best to fund. • Essential characteristics of V Bush social contract • high level of autonomy – few strings attached • institutionalisation of peer review to allocate funds • belief that basic research best done in universities

10. Main funding mechanisms • Institutional core funding for universities (not US) – general university funding (GUF) • block grant for teaching and research • allocated on incremental or formula basis • provides funding for research infrastructure (labs, equipments, technicians, libraries etc.) – “the well found laboratory” • Project funding • for specific research projects – additional costs • proposals submitted – ‘responsive mode’ • judged by peer review • funding decision by committee of scientists (often discipline-based)

11. What about mission-oriented research? • Ignores university research funded by government departments and ‘mission-oriented’ agencies • e.g. defence, health, energy, agriculture, space • Areas chosen reflected political priorities - ‘demand-pull’ model • US – defence, space, health • Japan – agriculture, energy • UK – defence, aerospace • France – defence, nuclear energy • ‘Mission-oriented research’ (cf. curiosity-oriented’) • very large funding (especially in US but also UK and F) • not just confined to technical universities

12. Changing characteristics of university research.

13. Changes in 1980s – 1990s • Driving forces • Economic problems (recession, inflation,1970s) • Growing costs of welfare state – health, education, social security • Liberal versus social-democratic views of government (new public management; the EURO) • Globalisation and growing economic competition • Growing importance of scientific and technological knowledge – the ‘knowledge economy’ • ‘Massification’ of HE • Growing cost of research

14. Changing public research systems • Governments introduced new/revised policies: • To enhance quality and efficiency of public research; • To stimulate business investment in research; • To strengthen research links/collaboration between public and private sectors (e.g. U-I, sc-industry); • To increase supply of QSEs;

15. Changing public research systems • To adapt to needs of service sector (increasingly important in OECD countries); • To achieve a target level of R&D spending (e.g. 3% in EU); • To fund research in priority fields; • To stimulate public understanding/engagement.

16. Changing public research systems • Reforms aiming to make the contribution of public research systems more effectively to innovation (were they successful?): • Universities given increased autonomy and/or transformed into quasi-private agencies (e.g. Italy, Japan, Denmark, Slovak Republic); • Decreased reliance on block funding and more on competitive project funds; • More emphasis on evaluation of HEIs and PROs (RAE early developed in the Uk/NL);

17. Changing public research systems • More emphasis on mobility of students and researchers; • Encouragement to protect and exploit intellectual property (IP); • Changes to IPR for universities and public research organisations (e.g. Germany, Denmark, Norway, Switzerland) • Technology/knowledge transfer made formal ‘third mission’ of universities (e.g. UK, Denmark, Norway) • Growth in patents during 1990s although slowed since 2000 (see role play)

18. Changing roles of university 1. To reproduce and transmit existing knowledge. • To improve critical reasoning and other skills • of individuals: • (i) as input to their work; (ii) to develop democratic, civilised society. 3. To increase knowledge base: (i) by pursuing knowledge ‘for its own sake’; (ii) by developing useful knowledge. To serve training and research support needs of economy (at regional and national levels).

19. New rationale: Contractual-oriented approach

20. The contractual-oriented approach 1 • Implementation: • Competitive mechanisms for resource allocation • Financial quasi-market incentives to steer university behaviour to meet societal needs and increase efficiency • Policies to increase selectivity and concentration • GUF declined in relative terms, and in some cases (e.g. UK, Australia) now allocated on basis of performance

21. The contractual-oriented approach 2 • Project-based funding increased in importance • Shift from responsive mode to directed programmes and to research linked to needs of ‘users’ • Growing emphasis on ex post evaluation • New government funding initiatives based on ‘challenges’ and competition e.g. Joint Infrastructure Fund

22. The contractual-oriented approach 3 • Implicit assumptions • Possible to evaluate quality of research output reliably • Possible to identify most promising research avenues • Costs can be reduced without sacrificing quality • Due to existence of economies of scale and scope, concentration increases output of overall system • Admin and other costs associated with more competitive system are small cf. benefits

23. Unintended consequences

24. Unintended consequences of the new rationale 1. Increased concentration of resources 2. Disproportionate incentives for short-term research 3. Conflicting incentive structures 4. Exacerbation of ‘Matthew effect’

25. Increased concentration of resources • Resources increasingly concentrated in few leading research universities (and M&A) • Implicit assumption that there are economies of scale/scope • But no strong empirical evidence for economies of scale/scope in university production • Either for research itself at level of department or institution (but ‘critical mass’ effect at level of group) • Or for joint production of teaching and research • Some scale economies for teaching and admin, and hence perhaps indirect benefits for research

26. Increased concentration of resources • Adverse consequences • Fewer resources in lower ranked departments/ institutions to support new ideas and new people; decreased diversity may be detrimental to research in longer term, even if more ‘efficient’ in short term • What about mobility of students and researchers?

27. Increased concentration of resources • Lower ranked institutions less able to contribute to meeting regional needs • Temptation to undercharge, bidding for funds on added rather than full-cost basis – driving down prices to detriment of universities (become financially overstretched, staff overworked); evaluation of real opportunity costs; centrality of overheads.

28. Disproportionate incentives for short-term research • Evaluations tend to focus on short term e.g. publications in last few years • Emphasis on addressing needs of users may lead to neglect of longer-term research • Lack of incentives for long-term, path-breaking, ‘risky’ research • Decreased variety of research lowers probability of scientific novelty

29. Conflicting incentive structures • Different competitive funding schemes may create conflicting incentive structures • e.g. high-quality publications for RAE VS helping ‘users’ • Weakened teaching incentives • Traditional academic incentive structure (‘open science’) in conflict with private-oriented incentive structure linked to business-financed research: • Work with industry may bring problems of secrecy, delay in publication etc. • Risk that incentive structure of subsidiary source of funds may dominate university research behaviour

30. Exacerbation of ‘Matthew effect’ • Merton (1968) – success in research brings status and funding – further increases chances of future success • “To them that hath shall be given” – the ‘Matthew effect’ • Evidence shows very small proportion of researchers produce large share of most influential publications • ‘New economics of science’ (e.g. David) elaborated this in terms of path-dependence and self-reinforcing mechanisms (e.g. ‘increasing returns’) • Growing range of uncoordinated funding sources reinforces cumulative, self-reinforcing process • Means that researchers at lower-status universities locked into a ‘vicious circle’ as compete for resources and status – again lowers diversity

31. Conclusions

32. Conclusions 1 • Post-1945 rationale based on science-push model – simple, convenient, very successful • Significant changes in ~1980s (1990s/2000s depending on the country) • Switch to (or coexistence with) new rationale and more explicit ‘social contract’

33. Conclusions 2 • Used to justify increasing investment in research but comes with more ‘strings’ attached • Although could enabled science to be used more effectively as input to technology and innovation, also had important unintended consequences • Do the benefits outweigh the costs?

34. www.sussex.ac.uk/Users/prff0/mainpages/home.html : my home page various articles available

35. Linear Model of InnovationScientific knowledge as information cope well overuse Free markets zero price required for efficient use produce less than required