R&D and the financing of innovation in Europe
- Nov 20, 2009
On Thursday 22 October the EIB hosted the 2009 Economics and Finance Conference on the subject of “R&D and the financing of innovation in Europe”. Opened by President Maystadt and chaired by Vice-President Sakellaris, the conference was very well attended thanks to an impressive selection of speakers.
In his opening address, Philippe Maystadt stressed the growing role of investment in knowledge for economic growth and, hence, the EIB’s operations. The Conference shed light on the macroeconomic significance of Research and Development (R&D) and innovation. It also helped to explain why markets alone might tend to under-invest in R&D and discussed how public policies could address this problem.
Hubert Strauss of the EIB’s Economic and Financial Studies Division (EFS) started off the session entitled Intangible capital – facts and figures by illustrating that the business sector’s stock of scientific and engineering knowledge (the so-called R&D capital) was lower in the EU than in the US and Japan, but also unevenly spread across EU countries and industries. Bart van Ark, chief economist at The Conference Board, a global research organisation, stressed that other intangibles such as architectural designs, brand equity and organisational change also mattered for growth. He presented some broad measures of intangible investment for a dozen countries, including new estimates for Austria, the Czech Republic, Denmark, Greece and Slovakia. This showed that intangible capital is a key driver of growth in countries at the technological frontier and their close followers but is so far of limited importance in less advanced countries.
The main insight from Werner Röger’s (EU Commission, DG EcFin) presentation was that budgetary support for R&D is not enough to close the EU’s productivity gap with the US. In addition, policies to improve framework conditions are required such as reducing the cost of market entry, cutting risk premiums on intangibles and raising the supply of high-skilled workers. Together these policies would make it possible to close half of the EU-US productivity gap. To achieve more, the EU would need to spur service sector competition and enhance the quality of higher education.
The issue of knowledge spillovers took centre stage during the second session dealing with the economics of R&D. EFS senior economist Kristian Uppenberg kicked off the session by explaining that firms invested in R&D in order to make money and to survive, but pointed out that knowledge spillovers may nevertheless lead to collective under-investment.
Corrective policies can take many forms. Dirk Czarnitzki of Leuven University (KUL) scrutinised science-industry collaborations and presented new results for Belgium and Germany. He found that private firms working together with scientific institutions tend to to invest more in R&D than firms working together with other firms and that subsidised science-industry collaborations were even more R&D intensive. Jacques Mairesse (UNU Maastricht and CREST Paris) reviewed the effectiveness of the R&D tax credit, whereby a company can deduct part of its R&D expenditure from its tax bill. The R&D tax credit generally creates the desired increase in business R&D investment. Yet how large a “bang for its bucks” the country gets, varies widely across countries.
But is the additional R&D conducive to higher innovation outputs such as patents? Bruno van Pottelsberghe (ULB Brussels) presented a new industry perspective on the R&D-patent relationship. More R&D does lead to more patents but the relationship is weak: patent filings are an imprecise measure of research productivity since the propensity to file for patent protection depends on intellectual property (IP) rights, exposure to international markets and other country and industry characteristics. Disentangling the increasing propensity to file enables a ‘clean’ look at R&D productivity.
The afternoon session was dedicated to financing innovation. Setting the stage, Bronwyn Hall (UC Berkeley) showed that moral hazard and asymmetric information between innovative entrepreneurs and financiers lowered the supply of debt capital for new innovative firms. Moreover, the latter have essentially intangible assets, which are difficult to use as collateral. Equity is therefore the prevailing mode of financing innovation. Laura Bottazzi (Bologna University) discussed the role of venture capital (VC) in financing new dynamic firms. She found that in contrast to US experience, VC in Europe was not associated with particularly dynamic companies. A key factor in VC effectiveness is human capital. Higher levels of post-graduate education and professional experience affect the level of activism of venture capitalists and their value added. However, over time, VC investment styles in the EU appear to be converging towards those in the US.
Jacques Darcy of the European Investment Fund discussed trends in technology transfer, another field in need of both financing and entrepreneurial expertise. Drawing on EIF experience, he pointed to the risks and capital needs involved in the transition from university research to business innovation. He reviewed new financial instruments helping to align the incentives of inventors, entrepreneurs and investors. Dietmar Harhoff (University of Munich) explained that patents could serve not only as IP protection but also as collateral. Patents have been used as assets in patent funds seeking to commercialise patent rights. Patent auctions are indicative of a nascent market for patented technology, the development of which depends on an appropriate design of patent systems.
In his concluding comments, EIB Vice-President Plutarchos Sakellaris reminded the audience that a proper understanding of knowledge creation and innovation was paramount for ensuring high standards of living in the long run. Large players like the EU need to take the lead in addressing the policy challenges and the EIB Group has a role to play in alleviating financing constraints.