that smaller countries benefit more from foreign R&D than larger ones. This might be because
researchers from small countries cooperate more with researchers from abroad and also because
small countries do not have the economic capacity to research as much as bigger countries. To
be able to absorb the foreign research the country has to have a certain amount of technology
itself, the free-rider approach does not work.
The above insecurities are illustrated in the box below.
Box 3 - Tentative cost-benefit analyses of public investments in R&D
The two tentative cost-benefit analyses are based on different empirical findings but because of
different insecurities they should not be viewed as conclusive in any way. In spite of that, the two
examples do give a picture of the sensitiveness by having both an unfavourable example and a
favourable example. The former can represent countries with a high marginal tax rate whereas the
latter can represent countries with a low marginal tax rate.
Unfavourable Favourable
The social benefits:
Additional R&D volume attributable to the public investmentsa ........................ 50 pct. 100
pct.
Social return to the additional R&D................................ 30 pct. 70 pct.
Flow of social return starts in. 2 years 2 years
Social rate of depreciation of R&D................................ 10 pct. 0 pct.
Discount rate...................... 6 pct. 6 pct.
Risk premium..................... 4 pct. 2 pct.
Windfall gainsc.................... 50 pct. 0 pct.
Total social benefits............. 118 pct. 499 pct.The social costs:
Social opportunity costs of the investments (distortion loss)a.. 40 pct. 10 pct
Administration costs governmenta............................... 2 pct. 2 pct.
Administration costs performersa................................. 5 pct. 5 pct.
Opportunity spillovers of additional R&D workersb....... 15 pct. 5 pct.
Total social costs................. 158 pct. 142 pct.Social net benefits............. - 40 pct. 356 pct.Internal rate of return........... - 1.3 pct. 35 pct.
Notes: a As a pct.age of the investments.
b As a pct.age of the social benefits.
c Windfall gains are that part of the investments that do not lead to extra R&D but to
higher profits for entrepreneurs and higher salaries for workers.
Source: The presentation is based on Cornet (2001).The total benefits are calculated using this formula:( 1 +δ+π)y−^1 (α+δ+π)Rwhere R = Social return to the additional R&D, δ = Social rate of time preference,
π = Risk premium, α = Social rate of depreciation of R&D.
Whether it is advisable or not for a country to invest in more R&D depends on the country’s initial
frameworks. In the two examples illustrated here there is a magnificent difference between the
outcomes since the welfare effect may be negative, but may also be very positive. Hence, the available
empirical results about the ingredients of the costs and benefits do not support a final conclusion about