Friday, March 23, 2007

Research and Development Spending

I think that Chris Dillow has missed a few plausible explanations of why research and development spending in the UK is lower than elsewhere.

1. Continuing weaknesses in British scientific education. These have been a problem for at least a century. While we continue to produce a healthy crop of scientists and sustain a superb contribution to high-level science there are serious flaws in basic, systematic scientific education in schools and not enough students choose to study science at university. This is hard to explain by institutional differences so is often put down to cultural factors. In particular, that university is often used to signal or change class and a scientific education is seen as 'grubby'.

2. British industry is 'too' competitive. Philippe Aghion set out how there might be a peak level of competition for research spending. Too little competition and a firm has no creative destruction pressure to innovate. Too much competition and following successful research spending firms quickly enter and swarm away the profits which might pay for the research. The ideal, if your objective is to encourage research, is firms with a strong market position which they seek to defend by outspending prospective rivals on research and development. Britain's is one of the most competitive world markets as it has little protection from takeover, the state has no real inclination to support champions and the country does not specialise in niche industries.

Combine this explanation with the third on the list of explanations Chris formulated, that there is generally a poor return to firms which spend on research and development. It looks like our competitive market encourages our firms to free ride off foreign oligarchy to all our benefit. Huzzah!

3. Service companies don't do much research and development. Britain's collective lifestyle is, to a remarkable extent, paid for by this share of global financial services exports:

Service companies always spend less on research and development. In particular, the spending that goes on developing new products and remaining at the leading edge of the industry which is accounted for as R&D in manufacturing companies is often less tangible in service companies. I won't address the "is deindustrialisation necessarily bad" debate here but, suffice to say, there isn't necessarily anything wrong with focussing on services. Particularly as that means you have to engage in a lot less competition with China.

Between us myself and Chris have come up with seven plausible explanations for low UK research and development spending. Of these only one, weak scientific education, really looks like a problem that the government should be trying to solve. A couple of the others could possibly be addressed but we are likely to cause more harm than good through other, unintended, consequences.

Perhaps low research spending is one of those issues that is best responded to with a dose of British benign neglect?

1 comment:

James Higham said...

Yes the scientific area is dire and has been for some considerable time. Students just aren't attracted to it and it becomes a circular thing, finally impinging on R&D.