SiT Centre for the Economic Study of Innovation and Technology
Are R&D subsidies to firms in the Flemish region useful? A qualitative study
Wim Janssens Sigrid Suetens
CESIT Discussion paper No 2001/07
October 2001
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Are R&D subsidies to firms in the Flemish region useful? A qualitative study. WIM JANSSENS Universiteit Antwerpen, Faculteit TEW UFSIA-RUCA Middelheimlaan 1, 2020 Antwerpen e-mail:
[email protected] tel: +32 3 218 06 73 SIGRID SUETENS Universiteit Antwerpen, Faculteit TEW UFSIA-RUCA Middelheimlaan 1, 2020 Antwerpen e-mail:
[email protected] tel: +32 3 218 07 27
ABSTRACT In this paper, results of interviews with R&D managers of Flemish innovative firms on efficiency of R&D subsidies are reported. Although in many – especially econometric – studies efficiency is interpreted in terms of how much additional private R&D investment is stimulated by government subsidies, it seems that on the basis of existing literature and our interviews it can be concluded that this interpretation is too narrow. Indeed, from the interviews we learn that public R&D could lead to more efficient use of R&D funds, e.g. through the creation of innovation networks between firms. Further, we give an overview of how the specific characteristics of the subsidy system, as it exists in Flanders, are evaluated by R&D managers.
Keywords: R&D policy, subsidies, Flanders, interviews, survey. JEL code: O38.
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1. INTRODUCTION The importance of technological innovations as a determinant of economic growth and competitiveness of a country has been recognized since several years. Investment in research and development (R&D), knowledge and new technologies indeed seems an important condition for firms to remain competitive at an international level1. On the other hand it is generally accepted that R&D and knowledge are not common private goods that are traded according to the market mechanism because of their public good characteristics. It is not always possible for firms to appropriate all returns that result from their R&D activities such that other economic agents are also able to reap benefits without bearing large costs. Obviously as a consequence of this – in neoclassical reasoning – firms invest less in R&D than socially desired. Government intervention in the technological domain is aimed at bridging the resulting gap between private and socially optimal R&D efforts. Whether government intervention, e.g. R&D subsidy policy, is efficient in the sense that additional private R&D expenditures are elicited, is a question that has been examined extensively in literature (see e.g. Levy and Terleckyj, 1983; Lichtenberg, 1984 and 1988 and Meeusen and Janssens, 2001). However, David and Hall (2000) argue that it is not necessarily true that social rates of return on R&D investment exceed private rates of return. The authors consider the existence of patent races, imitation, “excess correlation” among R&D projects of different firms, etc. that possibly result in a waste of R&D funds in some industries or domains such that the social rate of return is eventually lower than the private one. It is obvious that in such situation government subsidies aimed at raising private R&D in general elicit even more waste of funds. A restricted R&D subsidy policy, with only those technological domains in which no waste of private funds occurs, receiving support, is according to the authors hard to implement because of difficulties for government to evaluate the situation correctly. A first-best policy would be to restructure the (expected) pay-off structure of R&D projects, as the source of the excessive R&D investment lies within this structure. As such a policy is probably not feasible, the authors suggest implementing a policy of diminishing marginal tax credits for R&D investment. In this paper we report on surveys and interviews with R&D managers of Flemish R&D intensive firms as to describe how R&D support in Flemish firms is evaluated. Our aim is to interpret results of earlier econometric research in general and research carried out in Flanders specifically, in more detail. In the next section an overview of theoretical and empirical literature on crowding-out of public R&D is given. In section 3 the survey design is presented and in section 4 results of the surveys and interviews are described. Section 5 contains conclusions and policy recommendations.
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A recent study in which technological factors are found to be important in explaining the competitive position of a country is Meeusen and Rayp (2000).
3 2. CROWDING-OUT OF PUBLIC R&D FUNDS: AN OVERVIEW OF LITERATURE What can we find in literature on crowding-out of public R&D funds? Are there any indications that this government intervention stimulates firms to be more innovative, i.e. to spend more on R&D than would be the case when no support would be available? Or are the government funds a substitute for private funds of innovative firms, implying that R&D projects would have been set up anyhow, either with or without government support? Neither theoretical nor empirical literature provides unambiguous answers to these questions. Metcalfe (1995), Hall and van Reenen (2000) and David et al. (2000) are some of the few theoretical contributions to the domain of government support for R&D. With respect to the crowding-out issue they find that – assuming profit maximising behaviour – the size of the effect of an R&D subsidy on a firm’s own R&D expenditures depends on the structure of the marginal cost and the marginal product of R&D, where the marginal R&D product is defined in terms of a unit production cost reduction. The extent to which unit production costs fall when R&D investment rises, i.e. the R&D elasticity of unit production cost, and the elasticity of demand in the concerned market are factors that determine marginal R&D product. If these elasticities are high, R&D subsidies are less likely to substitute for own R&D funds and are thus rather additional. Other factors that shift the marginal R&D product curve are a firm’s market share, technological opportunities and the degree of appropriation of research results. On the other hand the structure of marginal R&D cost is among others influenced by technology policy measures as R&D subsidies and fiscal incentives that decrease costs unambiguously, and by other financial conditions, such as e.g. the possibility to attract high-risk capital. David and Hall (2000) argue that the inelasticity of researchers and R&D-input in general is an important cause of crowding-out of private R&D investment. It is assumed that if the public sector enters the market of R&D-inputs competition between private and public sector for R&D-inputs will increase, which in turn results in a rise of input prices. If the alleged inelasticity exists, real costs of R&D are raised by these price increases such that the expected return on R&D projects and of R&D investment in general has been decreased in the end because of government intervention. Nevertheless if because of possible technological spillover effects private demand for R&D inputs is also increased, or has been reallocated to those sectors or domains where as a consequence of high government intervention new technological opportunities and high returns are to be expected, the above reasoning is not completely valid. Let us further concentrate on how empirical literature has dealt with the crowding-out issue so far. In empirical literature, studies on this subject can be classified according to the level of analysis – i.e. either micro-, meso- or macroeconomic – and according to the nature of analysis – i.e. either quantitative or qualitative. It is obvious that meso- and macroeconomic analyses are mainly quantitative while microeconomic analyses can be either quantitative or qualitative. In this literature overview we concentrate on microeconomic literature because of the nature of our own research. The question whether public R&D support leads to additional private R&D investment is mostly answered in econometric analyses in which private R&D is regressed on a measure of
4 public-financed R&D. Although econometric analyses are used to evaluate the impact of direct R&D subsidies as well as of fiscal incentives, it is important to distinguish theoretically between the two kinds of government intervention at this point (see David et. al, 2000). It is unlikely that fiscal incentives would lead to crowding-out of private R&D – ignoring crowding-out caused by the inelasticity of R&D inputs – as they are generally available in the sense that they are not aimed at specific R&D projects or firms. Indeed, they reduce the marginal R&D cost in a direct way, rather than increasing the marginal return on R&D. Thus, when investigating the crowding-out problem with respect to fiscal incentives, it is not relevant to examine the extent of substitution of private R&D expenditures by public funds. It should rather be examined whether firms spend more on R&D when tax credits are available, and if they do, by which amount their R&D investment has increased. On the contrary, direct subsidies raise or are aimed to raise the marginal rate of return on R&D investment as they are supposed to be directed at domains in which the gap between the social and private rate of return on R&D investment is highest. If directed at R&D projects yielding a small marginal rate of return, it is very unlikely that R&D subsidies replace private R&D. In practice though, subsidies usually are granted within the framework of projects with high rates of return, according to David et al. (2000), mainly because these projects have a high probability of being successfully finished. Hence the expectation that crowding-out will occur to some extent. In Hall and van Reenen (2000) and David et al. (2000) overviews are given of econometric analyses on the efficiency of tax credits and direct R&D subsidies respectively. Hall and van Reenen (2000) conclude that studies on the impact of fiscal incentives for R&D on private R&D generally find that private R&D investment rises, as tax credits are available. The rise is rather small in the beginning, though, but tends to increase in time. It is found that on average firms invest one additional dollar in R&D for each dollar of foregone tax revenue. With respect to the efficiency of direct subsidies, such unambiguous conclusions cannot be made. Differences in econometric specification, in period and country, in level of data aggregation (macro, meso, micro) etc. lead to a diversity of results (see also Capron and van Pottelsberghe, 1997). According to David et al. (2000) the main cause of this diversity is the lack of a theoretical framework to examine effects of R&D subsidies. It matters whether the intended purpose of a study is to estimate the change in either marginal cost of R&D, marginal return on R&D or both. Nevertheless, one conclusion that can be made on the basis of econometric studies is that the higher the level of aggregation of data, the more evidence is found that subsidies tend to be rather additional to private R&D. A plausible explanation for this observation could be that technological spillovers exist of which the effects are only revealed completely at a macro level. Further, the authors conclude that non-American studies generally find more evidence that direct R&D subsidies are rather complementary to private R&D expenditures compared to American studies. In a recent paper Meeusen and Janssens (2001) investigate the crowding-out problem using a set of micro-economic data on Flemish firms for the period 1992-1997. They find
5 that direct R&D subsidies stimulate private R&D investment quite significantly. In large firms the amount of additional private R&D tends to be smaller than in small and medium sized enterprises. The authors warn for possible overestimation of effects of R&D subsidies, though. In the first place, it has to be taken into account that the underlying set of firms consists of firms that are assumed to be innovative and thus active in performing R&D. Beside this, Flemish R&D subsidies are mostly aimed at projects that focus more on fundamental and applied research than on product development. Hence – if it is assumed that R&D activities in firms mainly imply applied research and particularly development – it could have been expected a priori that additional private R&D be elicited by the R&D subsidies. To get more information on how firms or R&D managers deal with R&D subsidies and tax credits and on the extent to which they perceive public funds as either substitutive or additional to their own funds, econometric results should be complemented by findings based on qualitative data. Indeed, econometric analyses have their own statistical problems (e.g. identification problems, data mining, etc.) and they are only able to show direct effects of policy measures. On the other hand, surveys and interviews with R&D representatives have the drawbacks that strategic response behaviour and measurement errors regarding the estimation of returns on R&D projects can be present and form disturbances in interpreting results (van den Berg et al., 1989). From literature we learn that qualitative research methods are not used frequently to study the efficiency of R&D policy measures, neither as a complement to econometric analyses nor independently. Nevertheless we discuss some studies in which results on surveys and/or interviews with R&D representatives are presented. Mansfield and Switzer (1985) have asked a sample of 55 firms, which represented 30% of total private R&D expenditures in Canada, to estimate the effects of the fiscal incentives for R&D at that time on their own R&D expenditures for the period 1980-1983. Next to R&D managers, also financial and general managers were interviewed, either personally, by telephone or by means of postal surveys. The concerned fiscal incentives consisted on the one hand of R&D tax credits, which reduced R&D costs by 10 to 25%, and a “special research allowance”, which made it possible for firms to deduct half of any increase in operating and capital R&D expenses from their taxable income, on the other hand. According to the surveyed managers, own R&D expenditures were raised by about 3% (of which 2% resulted from the tax credit and 1% from the special research allowance), which did not make up for the loss in government revenue. It also seems that the fiscal measures have particularly stimulated smaller R&D spenders to invest more in R&D. Furthermore, van den Berg et al. (1989) reports on surveys with questions on the functioning of government measures to stimulate innovation in small and medium sized enterprises in the eighties in the Netherlands. From the 2600 users of wage subsidies, 56% participated in the survey. The authors find that in about 60% of the surveyed firms, R&D efforts of the R&D personnel at hand have increased as a consequence of wage subsidies. Beside this, the government measures have also stimulated some firms to hire new R&D personnel, to contract out more R&D and even to set up a separate R&D department. As
6 in Mansfield and Switzer (1985), the authors conclude that R&D incentives of smaller firms in particular are influenced by R&D subsidies. Finally, there is the qualitative study on government intervention in the R&D domain of Fölster (1990). In interviews 61 R&D managers had to give a general evaluation of some R&D policy measures2 on a seven-point Likert scale. Next to this they were asked to choose some representative project proposals related to their own firm – which have eventually been carried out or not – and to estimate the impact of some hypothetical policy measures on these projects and on their R&D expenditures in general. It seems that the R&D managers interviewed, consider fiscal incentives and wage subsidies as being attractive on the one hand, because of their administrative ease, but inefficient on the other hand, because of the small amount that eventually reaches specific projects. Next to this, the author finds that self-financing subsidies in general and stock option grants specifically score better than non-self-financing subsidies. Finally, also this study gives indications on government R&D support having a larger impact in smaller firms.
3. SURVEY DESIGN To give more information next to the available econometric estimations of the effects of R&D subsidies on private R&D behaviour in Flanders and to be able to interpret econometric results better, we did a qualitative analysis. The survey was carried out in spring 2000 and consisted of a combination of short questionnaires and interviews which all took about one hour. R&D managers and other R&D representatives of the in 1997 fifteen largest Flemish R&D spenders3 were questioned and interviewed. Thirteen of these firms are large firms, in the sense that their number of persons employed exceeded 250 in 1997, and the remaining two firms are medium-sized with a personnel number between 50 and 249.
Table 1 Coverage rate of the surveyed firms
15 surveyed firms (1) Flemish firms (2) Degree of coverage (1)/(2)
Intramural R&D expenditures 1997 31.1 billion BEF 72.4 billion BEF 43%
R&D subsidies 1997 0.9 billion BEF 1.5 billion BEF 58%
Source: CFS-STAT and OSTC (2001) and own calculations
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“… tax incentive, grant to R&D personnel, project grant, conditional loan, fee-based loan guarantee, royalty grant and stock option grant.” (Fölster, 1990) 3 We have not taken into account foreign firms, firms with difficult or unclear constructions (e.g. because of fusions, takeovers, etc.), nor firms of which R&D expenditures of 1997 are unknown because they did not answer the biannual R&D survey of 1998 carried out for OECD.
7 Table 1 represents the degree of coverage of these fifteen firms related to the firm set of the econometric study for Flanders (Meeusen and Janssens, 2001) and to the total group of Flemish firms, with respect to total intramural R&D expenditures and to R&D subsidies. The R&D subsidies concerned are the funds granted by IWT4 to firms within the framework of R&D projects. Table 1 shows that the fifteen firms account for almost half of total intramural R&D expenditures in Flanders and for more than half of R&D subsidies granted by IWT to Flemish firms. Without stating that the set of firms in our qualitative study is representative for the whole set of Flemish firms, we cannot ignore that the concerned firms account for a large part of the Flemish innovative landscape. That is why their visions and recommendations on R&D subsidies and R&D policy in general form an important indication on how firms deal with these policy measures and to which extent they consider them efficient or necessary. As already mentioned, the surveys consisted of a combination of questionnaires and interviews. In the first part of the questionnaire firms were asked to give indications on which parameters were important in determining their R&D investment decision. A distinction has been made between firm related, market related and government related parameters. R&D managers were asked to indicate the most important parameters in each of the three groups and to give indications on possibly missing parameters. In the second part of the questionnaire we elaborated more on the government related parameters. We e.g. asked to indicate on a five-point Likert scale whether planned R&D investment would also have been carried out without government support (from ‘totally not’ to ‘in any case’) and whether fiscal incentives for R&D have stimulated extra R&D expenditures. Independent from the survey, we asked for the opinion of the R&D representatives on the functioning of IWT and whether they had any ideas to make Flanders more innovative.
4. RESULTS Taken into account the confidentiality of the survey answers and interviews, we will give a general overview of the answers and remarks of the fifteen R&D representatives interviewed. As mentioned in the previous section, in the first part of the survey companies had to indicate which of the company, market and government related parameters they perceived to be important in deciding on their R&D investment. Company related parameters Among the parameters related to company characteristics, R&D activity in previous periods and the strategic long-term aspect appeared to be most influential when taking R&D decisions. Indeed, it was confirmed in the interviews that the building upon previous successes is an important factor determining firms’ R&D expenditures. By none of the interviewees previous R&D activity was regarded as a negative stimulus (e.g. because the company rests on its laurels). The strategic long-term choice of a company appeared to be 4
As a Flemish government institution, IWT (= Institute for the Promotion of Innovation by Science and Technology in Flanders) supports and stimulates industrial research and technology transfer in the Flemish industry.
8 a more important parameter than R&D investment in previous periods. Indeed, it is not exceptional that a firm’s R&D investment constitutes a more or less fixed share of turnover, implying that R&D intensity remains quite constant in time. However, most of the interviewees consider this parameter not as their own choice, but rather as a ‘conditio sine qua non’, to be interpreted as ‘you have to innovate to survive’. In a number of companies, that is in those companies where R&D itself is a social target (e.g. spin-offs and research centres) this argument is very important. One of the most important determinants that makes a company performing R&D in a certain area and that fits in its strategic long-term choice, is the possibility to patent the results of its R&D investments. Managers argued though that strategic choices of a company could also have a negative effect on a company’s R&D efforts. For example, when management decides to become independent within a certain time or when it desires to be taken over, it is possible that resources are re-allocated so that reducing debt becomes more important than investments in R&D. Being part of an international group seems to be another factor that is of importance for some companies when making R&D decisions. With respect to this, pros and cons were mentioned in the interviews. It seems that in some firms the market knowledge of the mother company constitutes a positive impulse in the sense that the R&D budget is better distributed. In other firms market knowledge of the mother company is rather interpreted as a negative factor though, as part of the autonomy of the daughter company disappears. Moreover, if a particular R&D project carried out in one firm of the group ends up to be unsuccessful, intra-group competition could result in a re-allocation of R&D budgets in the group. It is agreed that intra-group competition can be fierce in some cases. Some of the interviewees even think it would be advantageous for daughter companies to receive subsidies through a system of envelope financing without other companies of the group being informed, to be able to compete at the subsidiary level. This would make it possible for daughter companies to profile themselves as pioneers of certain new products or processes within the group, which increases the possibility to receive a considerable amount of the group R&D budget. Neither the company’s financial evolution nor other company related parameters appeared to be of any importance. Some circumstances exist though, in which additional R&D efforts are necessary. E.g. in the case of an acquisition of subsidiary, R&D investments will probably rise because of the importance of a fast integration of the new subsidiary. Market related parameters The R&D managers generally agreed that parameters related to market characteristics are the most important determinants of R&D decisions. Improving competitiveness and specific market prospects – which are closely related – in particular seem to be crucial factors when it comes down to deciding on R&D. Obviously, generating new products and processes increases a firm’s competitiveness in a direct way. However, the magnitude and direction of R&D investments also seem to depend on R&D investments of competitors. Indeed, it is possible that own R&D efforts are raised in order to catch up
9 with other firms such that the same or a higher level is eventually attained. In some firms R&D efforts of competitors tend to influence own R&D investment in a negative way though. Firms using this strategy hope to take advantage of the knowledge acquired by its competitors through technological spillovers. The possibility to engage in cooperation agreements also stimulates R&D activities according to a significant part of the R&D managers, through the formation of expectations on network formation. Only few managers recognized the importance of business cycles in determining R&D investment. Other market related parameters that seem of importance are more accidental factors such as shocks in the economy. An example would be the Belgian dioxin crisis that has created incentives for some firms to start research on harmful substances or to develop new, improved products and processes. Beside this, it becomes clear from the interviews that company and market related parameters are complementary when it comes to making R&D decisions. Market related parameters determine the choice of a company to do R&D or not, while company driven factors determine the budgets and consequently should be rather seen as a determinant of the magnitude of R&D investments. Furthermore, it seems that R&D budgets are often raised temporarily when exceptional opportunities arise. Government related parameters Among the parameters related to government, IWT subsidies, European policies and rules are considered to be the most important factors in the R&D decision process. Fiscal support measures were only reported by two companies to be of some importance. With respect to rules, the example of new environmental rules stimulating R&D investment, as companies are obliged to search for new processes that have to meet certain environmental requirements, was given. One could argue that together with starting new R&D processes, other processes are stopped for the same reason, but according to the interviewees, a positive net effect would be the result. In the second part of the survey the questions were focused on government related parameters, and more particularly on the role of R&D subsidies granted by IWT. From the 15 firms in the survey, 14 have received subsidies since 1992. In general, according to the interviewees, planned R&D activities would have been carried out at least partially, or even fully, without government intervention. This does not imply that subsidization by IWT is been assessed negatively by the R&D managers, only that it is questioned whether public R&D funds elicit additional private R&D. Indeed, about half of the firms have taken more risks regarding R&D investment, or have even been engaged in completely new research as a result of the IWT subsidies. Next to this, possibilities have been created to continue and deepen existing R&D activities and establish productive cooperative agreements. In one firm R&D subsidies have significantly stimulated the hiring of new research personnel. Thus, the at first sight negative assessment of IWT subsidies by R&D managers of large firms should be refined by other views of the interviewees, which we will discuss more thoroughly in what follows.
10 Concerning the fiscal measures with respect to R&D activities, the R&D managers were sceptical in general. Fiscal measures rather seem to contribute to ex post financial engineering, than to elicit extra R&D efforts. Some firms did not even know about the possibilities to get favourable tax treatments when hiring new R&D personnel in Flanders. During the interviews additional aspects of the crowding-out problem and efficiency of R&D subsidies, mainly with respect to the advantages and disadvantages of the R&D subsidization system in Flanders, were revealed. A first aspect that has been evaluated in a negative way by most of the interviewees is the application procedure for firms to be qualified for receiving subsidies. Firms have to prepare an extensive project proposal for this purpose, which brings about unnecessary administrative tasks according to the interviewees. Especially for smaller firms, the scientific requirements of the proposal seem to be a barrier to apply for government support because the administrative system is less extended than in large firms. However, also large firms complain about the high costs that go together with the preparation of project proposals. On average, preparation cost would amount to between 37500 and 50000 Euros (between 1.5 and 2 million Belgian francs)5. The required scientific character of the file makes it necessary to call in high-skilled – and thus expensive – personnel that constitute an opportunity cost. Indeed, those high-skilled workers cannot prepare the file and do R&D at the same time. Yet, some of the interviewees referred to learning effects that would result from applying for R&D subsidies. The more application files a firm prepares, the more experience it gains in carrying out such tasks, and the less time it takes. Beside this, the gained experience can be interpreted as a useful preparation to the application for European R&D projects. Another obstacle that came out of the interviews is related to the evaluation of the project proposals. Although the professionalism of members of the evaluation committee is generally recognized, the interviewees argue that sometimes the evaluation committee lacks industrial feeling. They think that specialists coming from business itself can often better assess technical specificities of new products and market expectations than the committee. Firms want to be more involved in the evaluation process that according to them should be less time-consuming. They propose that before the final evaluation decisions are made, a meeting is organized attended by the persons in charge of the R&D projects of the firms and the members of the evaluation committee. The counter-argument that non-feasible or non-productive projects are possibly not filtered if firms are involved in the evaluation procedure is not a good one, according to the interviewees, when related to large firms having an R&D track record. Those firms have already shown that they can use public means in an efficient way. To stimulate efficiency of R&D subsidies in Flanders, the time period between the submission of the project proposal and the granting of the subsidies, should be shortened according to most interviewed R&D representatives. They claim that the concerned period
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These overhead costs may seem high, but if we take into account that the yearly R&D budgets of the interviewed firms often amount to more than 500 million Belgian francs, and the part financed by IWT is around 100 million Belgian francs, the figures can be interpreted in another way.
11 takes from 9 months to 1 year6. Obviously firms want to transform new ideas into new process technologies or products ready to be introduced in the market as soon as possible, to prevent their competitors from taking advantage of technological spillovers and being ahead. That is why firms consider it important to keep the time delay between application and allowance of subsidies as short as possible. Finally, some interviewees have raised the problem of intellectual property rights, which is closely related to the possible existence of technological spillovers. Firms are to include detailed descriptions of innovative processes and products in the project proposal, which firms often prefer not to make public. That is why some firms do not apply for subsidies, which makes that some R&D projects are postponed or cancelled. It has to be noted though that some firms admit that this problem can be controlled, conditionally on the existence of good and airtight contracts between the involved parties. Although firms had some critics with respect to the Flemish subsidization system, they also recognized its positive aspects and importance. It is generally accepted that IWT has succeeded in stimulating cooperation and network formation, between the private and the government sector and between the private and the academic sector. IWT has played and is playing an important role in creating a basis for further development of cooperation. Concerning the relation between the private sector and the academic world, firms are convinced that even more cooperation is necessary and that universities should engage even more in applied research in cooperation with firms. Some of the interviewed R&D managers admitted that, although the total amount of R&D expenditures is not necessarily raised by R&D subsidies, R&D efficiency has increased as a consequence of a multiplier caused by networking. In econometric analyses, these effects are seldom shown. Another advantage of the Flemish subsidization system that has been thought of by several R&D managers concerns the stimulation of working through projects. Working through milestones – which implies that both parties, firms and government, make clear agreements about what is to be expected in the project and about when it is expected – is generally appreciated. In this way an ex post evaluation of project results will be done within a certain time perspective and firms receive feedback from the evaluation committee. Using this approach, it should in principle be possible to concentrate subsidy policy on risky projects, i.e. projects that would not be carried out without government support, such that government funds are completely complementary to private R&D. For firms, government support of risky projects seems to be an important matter. Although project financing is evaluated in a positive way by most firms, the disadvantages we discussed earlier seem enough to some firms to assert a system of envelope financing where firms would receive subsidies independently of any project. Administrative costs, long evaluation procedures, problems of intellectual property rights, etc. would disappear automatically. But at the same time all advantages related to concrete project agreements and incentives to cooperate also disappear. Besides from the point of view of government a system of envelope financing is characterized by some obvious drawbacks. In the first 6
IWT argues that in principle each demand for subsidies should be finalised with a decision after 75 workdays after the moment of acceptance of the project proposal. Thus, the problem arises before the moment of acceptance.
12 place in such system few transparency is guaranteed and possibilities to be selective are thus small. Next to this the same budget would have to be divided in smaller parts, or total budget would have to be raised. Thirdly, it is more likely that crowding-out of public funds would occur. Finally, envelope financing would experience large resistance from European Commission because of possible violation of competition rules. In the interviews proposals were made to establish a system of outline agreements that avoids the drawbacks of envelope financing and meets part of the complaints of the firms at the same time. In such outline agreements project descriptions would be less detailed that in the current system, such that intellectual property rights are protected sufficiently and a large part of administrative costs is eliminated. These agreements would also contain arrangements in which government support can be guaranteed in the long term, on the condition that some milestone requirements are satisfied, such that time delays will be less present and administrative costs are reduced again. A smaller administrative burden goes together with a smaller need of specialized R&D personnel. This creates possibilities to employ the newly available personnel in firms on the one hand and of the government evaluation committee on the other hand more optimally. Among the R&D managers, proposals were formulated to employ newly available R&D personnel in large firms with an important R&D track record to carry out scouting activities in smaller firms. Indeed, information and practical knowledge that is available in large firms can be useful to stimulate innovation in smaller firms. The interviewees realize that outline agreements should be combined with possibilities for government to do audits in firms on the progress of projects to check whether firms report their activities properly. Besides, transparency is necessary in order that European institutions maintain confidence in the system. To introduce this interactive function, as it exists in the Netherlands,7 qualified personnel are missing until now. Finally the interviewees were asked to do some proposals to make Flanders more innovative. All proposals can be summarized in two categories, i.e. popularise exact sciences and stimulate entrepreneurship. It was argued in the interviews that interest of students in exact sciences is reducing8. This lack of supply makes it hard for firms to find qualified R&D personnel. Beside this, it is obvious that the more students choose to study other than exact subjects, the smaller the probability that graduates come out with innovative ideas or projects, possibly concretised in a new firm. A way of stimulating entrepreneurship would be to incorporate a course in management in the curriculum of last year undergraduate students in exact sciences. To minimise the risk that interesting and innovating ideas of student-researchers are not concretised in new product or processes, these people have to be well informed about possibilities on this matter. That is why it is suggested to teach them some elementary aspects of starting up a firm.
7
This function is carried out by Senter, an agency of the Ministry of Economic Affairs in the Netherlands, responsible for subsidy, credit and fiscal arrangements and programs in domains of technology, environment, export and international cooperation. 8 Confirmation of this observation is found in Capron and Cincera (2000, p. 92): “… there is a shortfall of 4000 scientists and engineers in Belgium. This deficit is, in relative terms, the highest of the European countries.”
13 5. CONCLUSION AND POLICY IMPLICATIONS Are R&D subsidies to Flemish firms useful? On the basis of interviews with R&D managers in representative firms we can answer ‘yes’ to this question without any doubt. On the basis of our and other analyses some nuances should be made though. The general concern in research on efficiency of government support for R&D is about whether public R&D funds crowd out private R&D or how much additional private R&D investment is created by public support. We have learned from interviews with R&D managers though that the problem of efficiency of R&D subsidies should be interpreted more broadly than only in terms of either eliciting additional or crowding-out private R&D. On the one hand it is generally agreed by the managers that R&D projects would be carried out at least partially without subsidies, which seems to give evidence that the subsidies rather tend to crowd out private R&D. But on the basis of this argument alone, it cannot be concluded that private R&D funds is substituted completely by public funds. On the contrary, on the basis of the interviews one should speak of partial crowding-out at worst. Indeed, Flemish firms are apparently stimulated by IWT to cooperate, exploit technological spillovers and form networks through which R&D funds can be used more efficiently. Especially the integration of smaller firms in those networks, which creates possibilities for them to use knowledge available in large high-technology firms, is evaluated highly by the interviewees. Most of the managers argue that the current subsidy system is not flexible enough; the administrative burden, the large time delay between application for subsidies and the final granting and the doubtful protection of intellectual property rights form a barrier to an efficient finalisation of the dossiers. It is obvious that large firms prefer a system of envelope financing, as argued in the interviews, which makes that large R&D spenders are financed independently of any project. In practice envelope financing seems not feasible to us though. Such system would lead to only large R&D spenders with an R&D track record receiving government support and smaller firms being dropped out a priori, or – if government wants to grant subsidies to small firms too – is too expensive. Besides, envelope financing lacks transparency and makes it impossible for government to check whether public funds are used correctly. So we believe that the project approach should be maintained. The option to combine projects with outline agreements should be investigated further, though. An important part of the large administrative, mainly personnel, costs of firms involved in outline agreements would disappear, such that more funds become available to use for other innovative purposes, e.g. scouting activities in smaller firms. In this way R&D funds can be used more efficiently. Finally, we consider the option of fiscal incentives. A system of tax credits has some of the advantages of envelope financing in the sense that they are granted automatically and firms do not have to write extensive project proposals. Besides, tax credits are available for all firms that satisfy certain conditions regarding innovation (e.g. employment of new R&D personnel, new R&D investment) and discriminating selectivity of government as it would exist in envelope financing would not occur. From research in other countries we have learned that R&D tax credits often create additional private R&D investment. We believe
14 that the system of fiscal measures as it exists in Flanders should be promoted and extended. Indeed, possibilities to get fiscal relieves exist in Flanders, but as revealed in the interviews, firms are not well informed about it. The lack of clear data series on (use of) fiscal credits is also an indication of the related gap. Consistent series would permit to investigate the effects of R&D tax credits in Flanders in a systematic way which at its turn would make it possible to give well-founded policy recommendations.
15
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