Box 2 - Citations- “Currently, we do not have the robust and reliable ..tools..to state with any certainty what the
benefits of additional public support might be” (Salter, 1999). - “The findings (the effect of public R&D on private R&D) overall are ambivalent.... and the
“experiment(s)” that the investigators envisage is not adequately specified” (David et al.,
2000). - “The relationship between R&D and innovation is a complex, non-linear one” (Guellec et al.,
2001).
The question, however, is: does new research crowd out other developmental activities? Does
the government employ a researcher in a public research institution, who would have carried out
research in the private sector with potentially equally sized externalities? Furthermore, there
might be some private companies that will stop financing research because the government is
now paying for it.
The first crowding out effect is difficult to manage whereas the second effect has been estimated
in some studies. Unfortunately, the picture is not clear since the empirical results are diverging.
Some would even argue that public investments could generate more private research because of
the fact that the level of research has to be at a certain level to be able to absorb the research
coming from other places and countries, the so called absorption capacity.
Still there are some problems. First of all there is a methodological risk that both private and
public institutions will, at the same time, identify new potential scientific areas and therefore
scale down their expectations and with it investments in other areas. Statistically, the hypothesis
of a negative or weak crowding out effect will be confirmed both at firm level and industry
level. In addition, those industries that expand their research areas will tend to squeeze the
market for researchers and innovators on other industries.
Because of the above the most correct thing to do is to look at the macro level. The macro level
has the advantage of connecting the development in the total public research investments with
the total private investments.
The macro level releases new problems. Both the public and private research might be
determined by the same market trends and most importantly the total supply of highly qualified
labour. In other words, the total amount of innovation grows when the general frameworks
makes it propitious.
Especially in the short run where the supply can be rather stiff, there is a risk that more funds
for public research result in crowding out of private research and/or higher salaries for the
affected researchers.4 In the long run, however, the supply of researchers might increase.
For a small open economy like Denmark the calculation is further complicated by the fact that
part of the social returns accrue to foreign consumers and foreign firms because of international
spillovers. A study by OECD5 finds that the long-term elasticity of foreign R&D is as high as
0.459. The high elasticity suggests that other countries’ R&D matter more than domestic R&D
for the purpose of productivity growth, provided that the country and its industries have the
capacity to absorb technology coming from abroad. The result is consistent with the well-known
fact that domestic social return on R&D is higher than the private one. Several studies show6
(^4) Romer (in Jaffe et al., 2000) refers to a study that showed that an increase in the public investments in R&D
as a pct.age of GDP of 11 pct. from 1980 to 1984 resulted in an increase in the researcher’s salaries of 5-6
pct..
(^5) Guellec and Van Pottelsberghe de la Potterie (2001).
(^6) See for instance Coe and Helpman, 1995.