Behind many of today’s entrepreneurial success stories and revolutionary products that disrupt the world’s lifestyle lie the direct or indirect effects of R&D-related government support. Policies and measures to encourage companies to conduct Research and Development.
On December 2018, the OECD published its latest ranking of countries who invest the most in R&D. This ranking was topped by South Korea, Israel and Japan which respectively invest 4.3%, 4.2% and 3.4% of their GDP in R&D. In quantitative terms, the USA, China and Japan invest the most. It is therefore unsurprising that these countries are leading in many industry sectors with cutting-edge technology. Possession of a well-designed R&D strategy has placed them at the forefront of the international race for competitiveness.
Funding Support: A Pre-requisite for Innovation
Private capital isn’t traditionally associated with investment in R&D projects, which often creates a situation where the market fails to provide the required funding for R&D the determining factor of national competitiveness.
Government intervention in spurring innovation financing is undoubtedly crucial.
Indeed, many fields such as biotech, nanotech, greentech and information technology wouldn’t exist today without the intervention of the State, particularly through early-stage financing.
In the US, innovation boosts through financing from the Small Business Innovation Research program has proved to be more important than private venture capital. For instance, in Silicon Valley the government has taken on the role of a key investor through its public agencies such as The Defense Advanced Research Projects Agency and NASA. In China, companies such as Huawei and Yingli Solar, two global leaders in their respective fields, have benefitted from billion-dollar loans from the state-owned development bank.
Israel, which has the highest number of start-ups per capita and a remarkably low business failure rate, has focused on providing early-stage funding to companies with the greatest potential. A company investing in R&D in Israel qualifies for a rich support scheme, including, but not limited to cash grants, preferable tax rates, tax reduction and patent-related incentives. Similarly, the Finnish public innovation fund Sitra was behind the early financing of Nokia, without which Nokia probably wouldn’t have taken off in its early days.
Deeper Cooperation for Greater Competitiveness: Unleashing Europe’s Innovation Potential
In comparison with other regions, the European Union is operating below expectations when it comes to Business R&D spending.
The EU has the potential to lead the world in innovation, but its share of investments in R&D during 2016 only amounted to a 2.03% of GDP. The Europe 2020 target aims to ‘improve the conditions for innovation, research and development’ with the objective of ‘increasing combined public and private investment in R&D to 3 % of GDP’ by 2020. However, the region is still struggling to improve this inefficiency, despite upping its number of post-secondary graduates in STEM fields by 17.9 % between 2008 and 2012. Does intra-European cooperation, experience sharing and a harmonisation of R&D strategies and best practices create the optimal conditions for a new innovation era in the EU? Could a sound EU-wide financing policy be a game changer for the region? In any case, the EU certainly would benefit from sharing and pooling the resources and costs related to R&D; a field traditional characterised by risk and uncertainty.
Taking a look at a few of the most innovative countries’ R&D strategies highlights a clear pattern: public financing has been the critical variable in the success of the innovation.
States have long concluded that the rationality and risk aversion of economic agents would not lead to the necessary deployment of funds needed to sustain innovation and therefore national competitiveness.
By playing a leadership role governments were able to bear some of the risk and support private R&D through various mechanisms and policies. In an interconnected global economy, size matters in order to maintain a comparative advantage. Essentially, it’s time the EU takes advantage of its size to prioritise and set a new momentum for co-operation in R&D and innovation.
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