In the government’s recent Spending Review, Chancellor George Osborne had surprisingly good news for UK researchers and UK businesses. ‘In the modern world, one of the best ways you can back business is by backing science’, he said. ‘That’s why, in the last Parliament, I protected the resource budget for science in cash terms. In this Parliament, I’m protecting it in real terms.’

His recognition of the importance of public spending on research echoes the conclusions of a report published just ahead of the 2010 Spending Review by Research Councils UK (RCUK), the strategic partnership of the UK’s seven Research Councils. Research for our future: UK business success through public investment in research explored three questions:

  • What contribution does scientific research make to innovation, productivity and long-run economic growth?
  • Why does such a substantial share of a country’s spending on research and development (R&D) need to be publicly funded, even in the United States?
  • And is it really necessary for the UK to sustain the current level of public investment in science, particularly in straitened economic times – or can UK businesses and the UK economy ‘free-ride’ on research done elsewhere?

The answer to the first question is straightforward. Virtually all evidence indicates that the new knowledge and innovative ideas generated by research – whether done in the public or private sector – are key drivers of productivity growth. And as the economics Nobel laureate Professor Paul Krugman once wrote, ‘Productivity isn’t everything – but in the long run, it’s almost everything’.

Answering the second and third questions is more complex. To understand why public spending makes up a substantial proportion of total spending on research, it is essential to understand the idea of ‘market failure’ – a situation where, for various reasons, the private sector fails to deliver products and services that would benefit society.

In this case, the potentially high costs of research in terms of both money and time and the very uncertain payoffs discourage firms from spending as much on R&D as they otherwise might. They are further discouraged by their inability to reap all the benefits of research because of ‘knowledge spillovers’ to other firms. As a result, without public investment, society as a whole would underinvest in research.

Public spending on research can generate immediate returns in terms of commercial applications, university start-ups, spin-out companies and licensing of ideas and technology. But it also has a positive impact on private sector spending on R&D.

Fears are sometimes expressed that public spending of any kind ‘crowds out’ private spending: in fact, public spending on R&D ‘crowds in’ private spending on R&D. Not only is more private R&D done when public R&D increases, but that private R&D is more productive. The reverse is true too: reductions in public R&D reduce private R&D.

Alongside publicly available research results, universities provide much else of value to the private sector, including staff training, consultancies, conferences and contract research. Most of all, they produce an essential resource for business and industry: highly trained graduates. In addition, the UK’s universities are a significant source of export revenues via the many overseas students they attract (though this income stream is being damaged by current immigration policy).

The combination of new knowledge, top quality researchers and highly skilled graduates that universities produce is not only beneficial to UK firms. It also attracts inward investment by foreign-owned companies, which has many benefits for the UK economy.

This begins to suggest answers to the third question: why is it so essential to sustain current levels of public funding for research in the UK? Continued public investment in scientific endeavour is essential for the success of UK business and industry for the following reasons:

  • Geography still matters: the UK needs to be doing frontier research to generate local development around its universities, both through attracting inward investment and encouraging local innovation and local new businesses.
  • ‘Absorptive capacity’ is vital: the UK needs to be doing frontier research to be able to take advantage of frontier research being done elsewhere.
  • Skills: the UK needs to be doing frontier research to attract and retain world-leading researchers and to continue to build a high-skills economy.

Responding to the 2015 Spending Review, Professor Philip Nelson, chair of RCUK’s executive group, acknowledged the government’s renewed recognition of the value of public investment in research: “Our world-class research is the engine that drives growth, improves health and increases quality of life in the UK and beyond. We welcome the government’s clear recognition of this – protecting the value of the research budget and ensuring an absolute cash increase.’

Nobel Prize-winning geneticist and president of the Royal Society, Sir Paul Nurse, recently led a review of the UK research councils, the recommendations of which look likely to be implemented alongside the science budget settlement. He commented: ‘The Chancellor rightly declared the UK to be brilliant at science and by protecting the science budget in real terms, he is giving British scientists an improved chance of maintaining our global leadership, improving lives and driving the economy.’

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Notes:

  • This post gives the views of the author, and not the position of LSE Business Review or the London School of Economics.
  • Featured image credit: DNA extraction in action Col Ford and Natasha de Vere CC-BY-2.0

Romesh VaitilingamRomesh Vaitilingam  is a writer and media consultant, and a member of the editorial board of Vox. He is the author of numerous articles and several successful books in economics, finance, business and public policy, including The Financial Times Guide to Using the Financial Pages (FT-Prentice Hall), now in its sixth edition (2011). As a specialist in translating economic and financial concepts into everyday language, Romesh has advised a number of government agencies and international institutions, including the ECB, the EBRD and the UK’s Department for International Development.  In 2003, he was awarded an MBE for services to economic and social science.