1. Impact of Economic Crisis on Public R&D Georg Licht & Markus Nisch Center for European Economic Research (ZEW) Mannheim, Germany International Scientific Forum VUZF University Innovation: Engine for Economic Growth October 1, 2013, Sofia

2. Agenda  Motivation  Public and private R&D as Drivers of Growth  R&D Investments over the Business Cycle  Current Economic Crisis and R&D Investments  Summary and Conclusions

3. Introduction & Motivation  Barcelona 3%-objective [2/3 by business sector; 1/3 by public sector]  Crisis hit the incentives and the ability of firms to invest into R&D  Fiscal consolidation: Two-faced Simulating growth vs. limits growth-promoting investment;

4. R&D, Growth, Productivity - Literature  R&D, Growth, and Productivity  Theory: Romer 1986; Grossman/Helpman 1991; Aghion/Howitt 1998; etc.  Empirical Evidence: Coe/Helpman 1995; Griliches 1998; etc.  Social Returns to R&D >> Private Returns to R&D  Country level: Nadiri und Kim (1996); Park (1995, 2004); etc.  Industry level: Griliches (1973); Goto und Suzuki (1979); Bernstein (1998); Mamuneas (1999); etc.  Firm level: Jaffe (1986), Harhoff (2000), Rouvinen (2002); etc.  Public R&D as Driver of Productivity  Salter / Martin (2001)

5. R&D over the Business Cycle  PRIVATE R&D:  Expected returns -> Crises increase uncertainty -> Lower expected demand -> Downward pressure on R&D  Financial constraints becomes more severe: Cash flow limits; availability of bank loans reduce  However: (Opportunity) cost of doing R&D decrease  PUBLIC R&D:  Opportunity cost of R&D spending increase due to the impact of crises on the demand for other government intervention: e.g. counter-cyclical demand side policies, unemployment benefits, etc.  Lower tax income

6. Growth of R&D in Central Government’s Budget North-South Gap in R&D becomes larger during the current economic and financial crisis Additional public R&D spendings increase in first year of the crises but in later phases public R&D growth declines or even becomes negative

7. Private R&D, Public R&D, and R&D Intensity in 2010 Public R&D is more important for countries with a low R&D intensity North-South decline in R&D intensities BERD, HERD, GOVERD in % of GDP Source: OECD-MSTI 2013-1

8. Measuring Public Funds for R&D at the Country Level  GBOARD = Government Appropriations or Outlays for R&D comprise all the budget items involving R&D and measuring or estimating their R&D content (Includes central government only)  Public R&D spending = + Business Enterprise R&D (BERD) financed by Government + Higher Education R&D (HERD) excluding HERD financed by the private sector + Government Intramural R&D (GOVERD) excluding GOVERD financed by the private sector Source: OECD-MSTI 2013-1

9. Private R&D Expenditures and Public R&D Budgets - GBOARD Inflation Adjusted - Growth rates BERD Growth rates GBOARD Growth rates BERD Growth rates GBOARD Growth rates BERD Growth rates GBOARD Growth rates BERD Growth rates GBOARD

10. Growth Rate of Private and Public R&D by Period Source: OECD-MSTI 2013-1; EUROSTAT

11. Growth Rate of Private and Public R&D by Period Source: OECD-MSTI 2013-1; EUROSTAT Counter-cyclical government policy

12. Growth Rate of Private and Public R&D by Period Source: OECD-MSTI 2013-1; EUROSTAT Pro-cyclical government policy

13. Growth of Public R&D Budgets and Government Budget Deficits

14. Growth of Public R&D Budgets and Government Debt Level

15. Empirical Approach  24 EU member states (EU-27 excluding Romania, Luxemburg, Malta)  Panel data at country level; Unbalanced panel covering the period 1981-2012  Arellano Bond Estimator  Three different models: BERD, GBOARD, PubR&D normalised by GDP to account for size of countries  Specification: R&D it = f ( R&D it-1, GDP it-1, Interest it, Government budget defizit it-1, Government debt level it-1 ) + v i + e it

16. Drivers of Public and Private R&D Investments - Summary of Panel Regression Results -

17. Summary and Conclusions  Public and private R&D per GDP is positively related to GDP -> R&D spending move pro-cyclically  Government debt level and Government Deficits limits investment government into R&D  Surprisingly, interest rates influence government R&D spending but no impact on private R&D  Fiscal consolidation might have a positive effect on public R&D investment in the medium-term and in the long-run; Short impact of budget deficits depend on how governments approach fiscal consolidation; History however shows that public R&D has to contribute to the reduction of government benefits

18. Thank You For Your Attention Georg Lichtlicht@zew.de Center for European Economic Researchwww.zew.de ZEW, Mannheim, Germany Co: Science Metrix

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