Cost-Benefit Analysis for R&D Program Evaluation

1. Cost-Benefit Analysis for R&D Program Evaluation 2008. 11Jiyoung Parkjypark@kistep.re.kr

2. Contents Feasibility Analysis on R&D Programs Economic Analysis Practices Discussions

3. Feasibility Analysis on R&D Programs

4. Feasibility Analysis on R&D • Purpose • Substantiate the feasibility of large-scale public investment R&D programs • Enhance fiscal efficiency and productivity • Subjects • Newly proposed programs of budget plans over $50 M • Programs with concrete plans on technology development • Feasibility Analysis system has been legislated by the end of 2006.

5. Process Overall Assessment General Criteria Uncertainties Demand Goals Contents Resources Plan Expected Effects Alternatives Success Timing Benefits Do ? Do not ?

6. Components • Technical Analysis • Overlapping of existing programs, Research development plan, Potential to technical success, etc. • Systematic model approach • Output analysis (Patent, License, Publication and citation) • Surveys • Policy Analysis • Relevance to national strategic plan, National priority, Contingency plans for risks, etc. • National policy and priorities • Relevant issues and alternative plans

7. Components • Economic/Impact Analysis • Economic benefit, Economic spill-over, Social spill-over, Scientific/Technical spill-over, etc. • Input-Output Analysis, Patent Analysis etc. • Cost-Effective Analysis, Cost-Benefit Analysis • Surveys • Overall Assessment based on Technical/Policy/Impact Analysis (Analytical Hierarchy Process) • Determine relevant importance of each criteria • Maintain balance between qualitative & quantitative analysis

8. Economic Analysis

9. Cost & Benefit Analysis • Economic metrics for Cost/Benefit • NPV (Net Present Value) = Amount willing to pay now for the future benefit • IRR (Internal Rate of Return) = Rate of return if NPV is zero • C/B Ratio = Ratio of discounted cash flows • Types of benefit • Direct/Indirect, Tangible/Intangible, Economic/Non-economic… • First step is to be aware of the characteristics of R&D • Very high uncertainty, very high payoffs : internet, Life science, Solar energy … • Seed corn for the future, especially the early stage R&D

10. Types of Benefits

11. Applications to R&D Programs • Industrial R&D • Need to prove expected benefit exceeds projected cost • B/C result for major decision criteria • R&D for Public Welfare • Combined tangible & intangible benefits • B/C result for provide alternatives • Basic Research • Do not need to calculate B/C • Sometimes proves justification of public investment

12. Assessment of Costs • R&D activities for providing infrastructure • Research centers, Fabrication facilities, Large R&D facilities such as Accelerators • Cost calculation based on design, construction cost, etc. • R&D activities for producing knowledge, intellectual properties • DB for categorized program cost DB • R&D stages, R&D objectives, R&D field, etc. • Provides range of investment • Indirect costs are not considered. • Sunk costs are not considered.

13. Assessment of Costs

14. Assessment of Benefit • Approaches based on market size Market research Technology forecast Projected Market Size Expected Market Share Market analysis Patent analysis Profits Value-added rate -Published by Bank of Korea R&D Contribution to GDP growth by industry Contribution of R&D

15. Assessment of Benefit

16. Assessment of Benefit • Approaches based on performance data Performance analysis data of similar programs Expected # of Patents Business from the patents Follow-up monitoring of similar programs Profits Value-added rate -Published by Bank of Korea R&D Contribution to GDP growth by industry Contribution of R&D

17. Assessment of Benefit • Approaches based on synergies among investments Expected increased # of papers Case studies - Integration, new facilities Spin-offs by unit input Averaged over 3 years Case studies - multiplier effect Benefits from R&D

18. Assessment of Benefit • Approaches based on cost avoidance User data - Current and future demand Expected # of users Cost avoidance (in use of R&D facility) Traveling cost Time-saving

19. Practices

20. Examples – Targeting Economic benefit • New drug discovery (target materials) • Reduced initial investment was recommended • Increased investment will be considered after 4-year program monitoring

21. Examples – Combined benefits • Fusion Research for environment • Rejected for R&D program targeting industrialization • Recommended small investment for early-stage fusion research

22. Examples – Intangible benefits • Basic Research for Clean Energy • Never used the numbers for decision making • Provide justification of governmental investment

23. Discussions

24. Discussions • Heroic calculation? • Not a real data • Need guidelines of boundaries • Need more intense data on program performance • Need to know more on the mechanism of success or fail to reduce uncertainty • Need guidelines combining B/C result and cost-effectiveness to make decision • We still want to apply cost-Benefit analysis on R&D`!

25. Thank You ! jypark@kistep.re.kr