Memorandum submitted by Jonathan Haskel
(FC 73)
How much does publicly funded research contribute
to UK economic growth?[109]
Universities undertake two major tasks: teaching
and research (the third being the administration required to manage
these processes). There are then at least two possible mechanisms
whereby these tasks affect economic growth:
(a) Teaching. More skilled students raises the
human capital of the workforce and so growth.
(b) Research. New knowledge spills over to other
sectors, raises their knowledge capital and so leads to new products,
services, methods of production etc.
This note attempts to quantify the second of
these effects and thus the impact of a cut in public support for
research. The first effect is quantified in Haskel (2010).
The impact of publicly funded university research
on the economy
How much does the knowledge from university
research spill over and so affect growth in the private sector?
The problem with estimating this is that the private sector is
itself generating knowledge via its own investment in R&D,
software and other knowledge spending, so one has to separate
out the role of this and that of universities, plus other effects
such as knowledge from abroad etc.
First some facts. UK companies spend around
£12 billion per year on R&D. The UK government spends
around £10 billion on R&D. Such public spending Britain
ranks 9th in public support for higher education, in the form
of grants to universities and research councils for research,
among OECD countries, relative to 16th in 1996.
That reported public spend on R&D consist
of about 33% spend on research councils, 33% on defence R&D,
20% on civil R&D (ie in non-defence Government departments)
and the rest being the general support to university research
(funding distributed according to RAE performance). The research
council money is then obtained by universities in turn by competitive
allocation. It is spent on funding the discovery of new knowledge
paying for researcher time and equipment. Such new knowledge must
be made publically available. Of that research council money,
over 90% goes on engineering, natural sciences and medicine. Funding
for social sciences and the arts is about 6% of the total.
In Haskel and Wallis (2009) we have attempted
to measure the extent to which such public support raises private
sector growth. Again, this is not the only metric; medical support
for example might raise life lengths or happiness, but this is
the metric we choose. We do so because it is argued, by those
who wish more taxpayer support to be forthcoming, that the ideas
created by publically funded research are freely available and
so can be commercialised by the private sector. If this is so,
then the private sector should not mind funding such knowledge.
If on the other hand, the private sector is asked to fund knowledge
that provides them no advantage, then taxpayers have reason to
be unhappy.
Measuring the effect then of public sector knowledge
on private sector growth is a tricky undertaking, for one has
to control for all the other factors that might affect private
sector growth. The most obvious ones are the accumulation by the
private sector itself of its own knowledge, via investment in
R&D, software etc. plus the accumulation of other inputs,
such as hiring more labour and employing more machines. Thus the
starting point is to try to measure that part of growth not accounted
for by own investment in knowledge, capital and labour; this is
called total factor productivity growth (single factor productivity
is output per unit of labour input, total factor productivity
is output per unit of labour, capital and own-knowledge input).
Total factor productivity growth is then that part of private
sector growth determined by factors not directly funded for by
the private sector. So it could be determined by publically funded
knowledge from UK universities that is free to everyone. Or it
could be determined by knowledge freely available from anywhere
in the world, be it publically funded by other countries or privately
funded, but leaking out of the private sector in those countries.
The medium of such knowledge spillovers could be the internet,
or foreign trade or foreign direct investment. Attempting to parse
out these possible effects is what our study tries to do.
The main finding is set out in Figure 1.
Figure 1
Smoothed TFPG and RCouncil R & D spend
Note: Research council
spending is as a proportion of GDP, lagged one year.
The vertical axis shows total factor productivity
growth (TFPG). In 1987 for example, the upper left point, this
was 2.5% (each point is a year). The horizontal axis is spending
on research councils in the previous year (as a proportion of
GDP). The scatter shows the line of best fit and is upward-sloping.
That says, in words, that increases in public support for R&D
via research councils is associated with increases in private
sector TFPG a year later (a very similar picture holds for lags
of two and three years). Of course the relation is noisy and other
factors are likely occurring, but the points turn out to lie sufficiently
close to the line to give a statistically significant relation.
The point can be further illustrated below.
These show cross plots with the other spending categories, civil
and defence R&D. There is not as strong a relation; in fact,
the relation is statistically insignificant.
Figure 6
We can further use the slope of the line to
determine the contribution of research council spend to GDP. Current
spend is around £3.5 billion. The slope of the line suggest
this gives around £60bn additional market sector output.
If, to be conservative, one halves this, one gets a contribution
of publically funded research to GDP of £30 billion, which
is about 2% of GDP. Put another way, if support for research councils
was cut by, say £1 billion from its current £3 billion,
GDP would fall by around £10 billion.
REFERENCESJonathan
Haskel, (2010), "How much do UK Universities contribute to
UK Economic Growth?", draft paper, available on request from
c.edlin@ic.ac.uk
Jonathan Haskel and Gavin Wallis, (2009), "Public
Support for Innovation, Intangible Investment and Productivity
Growth in the UK Market Sector", draft paper: http://www.ceriba.org.uk/bin/view/CERIBA/PublicSupportCeriba
Jonathan Haskel
Imperial College Business School
January 2010
109 The views set out in this note are solely those
of the author. Back
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