Public investment in R&D and innovation in times of crisis Andrea Bonaccorsi University of Pisa Coordinator, Group of experts for Research and innovation policies on Structural Funds, MISE-DPS Member, High Level Expert Group on The role of European research policy in the knowledge-based economy, DG Research

Outline Rationale for public expenditure on R&D and innovation under the financial crisis Conditions for success Policy instruments The Italian case

Rationale (1) Private investment pro-cyclical Investment of companies into R&D tends to be pro-cyclical, being based on budget decisions proportional to (expected) turnover In times of financial crisis, the risk-return profile of R&D investments may be tilted towards less risky projects Public expenditure should be less sensitive to considerations of budget or turnover and risk avoidance Anti-cyclicality of public investment needed to compensate

Rationale (2) Short term impact of public expenditure Public investment in R&D and innovation may have an impact on GDP even in the short-to- medium term –Short term impact –High value added –Well paid jobs –Highly skilled young workers –Credibility of the government commitment to innovation –Medium term –Incentives to industrial R&D and innovation have an impact on GDP per capita within 3 years (DPS research, 2005)

Rationale (3) New types of products needed to re- establish consumer trust Durable consumer goods hit by the collapse of consumer trust In durable goods, the substitutes for new purchases are existing products. After a long crisis, consumers learn they can avoid new goods To establish new trust for the future, consumers need to find “new functionalities” in products, not the old ones (which they know can be sacrificed).Bread and roses psychology This requires companies to credibly announce now they will be ready to introduce new products with significant innovations (e.g. low cost car, new energy solutions, Life Cycle efficiency, Design for Environment etc.). This attitude should be supported by public policies.

Conditions for success (1) Credibility Government initiatives must be considered credible by economic actors. This implies -timeliness of decision -commitment to reduce the burden of bureaucracy -fast implementation

Conditions for success (2) Concentration Expected impact more important if resources are concentrated on a few visible areas Concentration also helps in controlling for results in the short- to-medium term By rising the visibility of programmes there will be more political commitment and orientation to results

Conditions for success (2) Additionality Companies may be tempted to trade-off liquidity from public sources with own investments Empirical evidence shows the net effect of public incentives to industrial R&D is usually positive and additional, although the size of additionality is largely dependent on policy design and administrative efficiency

Recent Italian experience with Structural Funds (1) Quality of policies There is no alternative to continuous effort to improve the quality of policies and to maximise policy learning at national and regional level This requires extensive interaction between policy makers, administration, and experts from academia and industry Programme on R&D and innovation policies on Structural Funds- DPS

Recent Italian experience with Structural Funds (2) Framework agreement MIUR In order to accelerate expenditure in less developed regions, the Ministry of Research signed Framework Agreements with Regional governments, allowing rapid implementation of programmes using national policy tools, already notified to the EU and approved, e.g. -Technology districts -Incentives to industrial R&D -Research infrastructures

Recent Italian experience with Structural Funds (2) Technology forecasting and roadmapping for Southern regions MISE recently launched an exercise to prioritize research and innovation programmes in all Southern regions. This exercise (“Analisi fattuale”) has covered: 1.Energy 2.Nanotechnology 3.Life science 4.ICT already delivered, plus (in preparation) 4. Materials 5. Agro-food 6. Transportation