Public vs Private R&D Funding: Unleashing the next wave of Radical Innovations
by Yasir Aheer, Varun Rao and Rahul Rao
Summary:
Most commercial innovation programs are guided by their respective business cases; such an incentive moulds innovation outcomes towards incremental improvements rather than radical breakthroughs.
A country’s long-term prosperity depends heavily on the competitiveness of its business sector, and staying competitive requires investments towards innovation.
Both Public and Private funding play a vital, even interconnected, role in nurturing a vibrant and innovative economy.
While global spend towards R&D is currently at an all-time high, Australia’s focus might be waning as funding relative to GDP has been dropping in recent years.
An innovative economy requires a close partnership between the public and private sectors, each playing its unique role. Governments lead high risk scientific pursuits, while businesses commercialise new ideas, creating employment and wealth in the process.
Archimedes (287 BC – 212 BC), a Greek scientist and philosopher, famously said, “give me a lever long enough … and I shall move the world”. We bet no one asked for a Return On Investment (ROI) estimate for this whimsical endeavour. Such is the reality of modern innovation pursuits. Most commercial innovation agendas are guided by their respective business cases, i.e. projected financial returns. Such an incentive casts an invisible force, moulding innovation outcomes towards incremental improvements rather than the radical breakthroughs that most innovation programs set out to achieve.
A country’s long-term prosperity depends heavily on the competitiveness of its business sector, and staying competitive requires investments towards innovation. Several economic theories, such as Nobel Laureate Paul Romer’s Endogenous Growth Theory, suggest an increase in Research and Development (R&D) spending - investments in knowledge, ideas and human capital - translates to significant long-term economic growth. Broadly speaking, there are two sources of funding: Public or Private. Both sources play a vital, even interconnected, role in nurturing a vibrant and innovative economy.
Global spending towards Innovation and R&D is currently at an all-time high of US $1.7 trillion. However, Australia’s focus on Innovation might be waning as R&D funding relative to GDP has been dropping in recent years, impacting our competitiveness relative to global peers (Figure 1). Australia spent AUD $33 billion (1.8% of GDP) over FY17 - FY18, with business funding accounting for more than half at around AUD $17.4 billion.
While the benefits of business spending towards Innovation and R&D cannot be understated, government funding plays an irreplaceable role in furthering critical knowledge areas that don’t have immediate economic returns - such as basic research. Famous astrophysicist, Neil DeGrasse Tyson highlights that throughout history governments have funded and led efforts at the frontier of our knowledge. Journeys beyond the horizon are filled with risks that cannot be assessed, and economic value that cannot be reliably quantified. Hence, it is not possible to structure a successful private enterprise driven to unlock financial returns. On the other hand, governments are guided by long-term interests of their society, including defence and broader competitiveness of the economy. Such drivers allow governments to, in essence, “socialise” these risks and the failures along the uncertain road of scientific R&D.
Economist Mariana Mazzucato, author of The Entrepreneurial State, goes further by claiming that the private sector makes up the last and least risky part of innovation and entrepreneurship. She argues that while the private sector is credited with the smartphone innovation, the underlying technology that makes a phone “smart” was already invented through government funding - such as the internet, GPS, and touchscreen display.
Direct R&D funding is a crucial channel used by governments to shape the national innovation agenda. Even without short-term economic goals, it is an important lever to influence the velocity and trajectory of innovation. A recent paper shows that a 10% increase in defence R&D results in a 4% increase in private R&D. Simply put, increases in government spending on research encourage the private sector to do more on their own. This creates greater employment opportunities and boosts the knowledge and skills of workers.
While it is the government's responsibility to drive the national innovation agenda, an innovative business sector is vital for long-term competitiveness of an economy. According to UNESCO, the top 15 most innovative countries (by spend) have one thing in common: a strong contribution towards Innovation and R&D spending from the business sector. And for businesses, incentives matter. Australia relies heavily on indirect funding measures, such as R&D Tax Incentives (R&DTI), relative to our peers (Figure 2). While such schemes are simpler (and cheaper) to administer than the direct options, there are concerns regarding their effectiveness when it comes to productivity growth. Indirect measures can also skew investment towards applied rather than basic research. Such dynamics could lead a country towards incremental rather than breakthrough innovations.
Historically, governments led ventures into the uncharted scientific territory, motivated mostly by national security. The business sector subsequently built on the knowledge spill-over and figured out viable business models spawning new markets and industries. One example of such dynamic can be found in the ultimate frontier: Space. Fueled by the Cold War, governments led the charge in terms of research and development, starting as early as the 1950s. Space remained the realm of governments for several decades. As the risk and uncertainty decreased, an increasing number of private enterprises started pursuing space based business ventures; from launching mini-satellites into orbit, to space cargo delivery and tourism. The most ambitious private project is, of course, billionaire Elon Musk’s aspiration to make “humans multiplanetary” with his eyes set on Mars. SpaceX is targeting its first uncrewed missions to Mars as early as 2022.
Ultimately, an innovative economy requires a close partnership between the public and private sectors, each playing its unique role. Governments lead high risk scientific pursuits, while businesses commercialise new ideas, creating employment and wealth in the process. It is only through this interconnected partnership that we can unleash the breakthrough innovations of the future. And, while we may not need to “move the world” as Archimedes had wanted, we might just be able to to move mankind to a new world.
Co-Authors:
Disclaimer: This article is based on our personal opinion and does not reflect or represent any organisation that we might be associated with.