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Over the past 40 years, across the rich world, R&D has increasingly been funded by private companies, rather than the state or public bodies such as universities. Booming spending by companies such as Amazon has masked flat or, in the US, falling public support, which the current US administration wants to cut by a further 35%.
Until very recently, policymakers and politicians on both sides of the Atlantic have largely shrugged their shoulders at this private shift. They often assumed that it doesn’t matter much who funded R&D, so long as more money flows into the system, and many have welcomed the surge in corporate spending. The EU, Germany and the Netherlands, for example, all have overall R&D spending targets which are agnostic on who stumps up the cash.
But a new generation of economists say they now have the first empirical evidence that this reliance on privately funded R&D may have been a historic mistake.
This debate is still just beginning. But if they are correct, the failure to invest in public research helps explain why productivity gains due to technological innovation in the rich world have slowed to a crawl, leading to anaemic growth that aids the rise of radical, anti-establishment parties in Europe and the US.
“There is this growing consensus [. . .] that the decline in publicly funded R&D has contributed to the deceleration in productivity growth,” said Andrew Fieldhouse, an assistant finance professor at Texas A&M University. He’s one of the economists whose work challenges the shift to private R&D, and it has recently caught the eye of some governments. “I think a lot of policymakers are concerned,” he said.
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Rising business R&D is still a good thing for the economy, economists stress. No one is criticising companies for spending more; quite the opposite.
But the problem, some economists say, is that this boom in corporate spending has masked stagnant or falling levels of public support for research.
“If you look at the United States’ R&D share of GDP, if anything, it’s trending up a little bit, and there’s no immediate cause for concern,” said Fieldhouse. “But if you lift up the hood, there’s a big compositional shift going on down there.” If the funding source of R&D matters, “that compositional shift may be quite problematic.”
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Why are public returns higher?
If Fieldhouse and Dyèvre [two researchers] are right, why might public R&D spending be more economically beneficial than private?
Their findings, at first glance, sound counter-intuitive. Corporate R&D divisions, after all, have to create saleable products to survive. University-based scientists don’t. “This is the trillion-dollar question,” says Fieldhouse.
One leading explanation is simple, and will be instantly familiar to most scientists. Public funding is much more likely to back openly published basic research: often curiosity-driven science that tries to understand the universe, rather than develop a specific technology.
This creates more beneficial spill-overs in the rest of the economy, because anyone can pick up and use this understanding. The germ theory of disease, which revolutionised medicine from the 19th century, is inherently impossible to commercialise, for example.
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Free rider problem?
One objection to spending more on basic science is precisely because it’s open and unpatentable, other countries will benefit just as much as the funding state, creating a free-rider problem.
But the economists who spoke to Science|Business aren’t too worried. They point out that geography and face-to-face connections are still crucial in turning fundamental science into real-world inventions. In Boston, the London-Oxford-Cambridge triangle in the UK, or Munich, say, the tacit knowledge of leading university researchers is an essential part of high-tech cities.
Basic research creates a “pool of common knowledge” all private firms and broader society can use, as Filipetti puts it. But if basic science gets cut, “this amount of common knowledge shrinks over time.”
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The US Congressional Budget Office recently published a new paper estimating returns to public R&D similar to those identified by Fieldhouse. Although the Trump administration wants to cut public R&D, these kinds of behind-the-scenes accounting shifts may well outlast him.
“I think the consensus among policymakers has changed rapidly over the past few years, in particular in the US,” said Dyèvre. “With the exception of the current administration, a lot of policy folks are convinced more public funding for R&D is needed.”
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UK spending plans for the rest of the decade show the country increasing R&D incentives for new companies, while money for “curiosity-driven” research will flatline.
As for implications for the EU, Dyèvre and Fieldhouse’s work is based on US data, so some caution is needed. And boosting public research is far from a silver bullet, . The bloc also needs to crack other intractable problems, such as integrating its single market. That said, “most countries in Europe would benefit from higher spending in public R&D dedicated to fundamental science,” Dyèvre said.
But as Europe frets about its immediate economic woes, the focus instead is on corporate innovation. For example, as part of a new economic strategy, Czechia is prioritising applied invention, not basic science.
And in the EU’s next research and innovation programme, which starts in 2028, the European Innovation Council, which largely gives out grants to entrepreneurial academic teams and start-ups, will be the biggest winner, with an inflation-adjusted budget boost of around 139%. The fundamental research-focused ERC will see a more modest increase of around 54%.
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