This toolkit, created by the MONROE research consortium, aspires to provide a friendly and intuitive way to assess the economy effects of Research and Innovation policies and other measures and policies that affect Europe’s innovation capacity. For more information on the research work underpinning the visualisations of this toolkit, please visit https://www.monroeproject.eu/

Effect of research and innovation (R&I) policies

Research and Development (R&D) spending refer to the expenses associated with improvements or the creation of new products and services. Such expenditures play key role to technological improvements, and by extension, to economic growth. These kind of improvements allow, for example,  firms to be more competitive, countries to use their resources more efficiently, and governments to improve economy’s growth potentials. According to some widely accepted theories of economic growth, what effectively lies behind such innovations is the development of new ideas. Taking this element into account, it could be said then that RD expenditures are essentially the type of spending aiming to fund these ideas. Through these type of investments new innovation are expected to take place, and therefore improve the existing technologies.

Besides, new innovations create knowledge which others can also use and hence benefit by adapting the same or similar technologies. The potentials, therefore, from this form of knowledge spillovers and the subsequent adoption of new technologies is what makes innovations to have a widespread effect on the economy, and the main reason explaining why RD expenditures are so essential to country’s development.  It also explains why some firms or large corporations who already use advanced technologies – the so-called technological leaders –  are so essential in economy’s growth as it allows other firms to mimic their innovations. Moreover, and since knowledge spillovers could easily travel across the world, innovations taking place in one country could also benefit other countries as well, since innovations taken place in one place could be easily adopted elsewhere. As a result, countries who are far behind the technological frontier – namely, the country with best technologies – could grow extremely fast and catch up with more advanced countries once they adopt the new technologies or allocate themselves more money in Research and Development.

In all this process of innovation, however, there is one key input that can be actually be described as the locomotive behind the development of new ideas. This input is no other than people who could actually undertake research or develop new products due to some special skill they have. In that respect, economy’s overall human capital – namely, peoples’ qualities - evolves into another key factor behind economic growth. Its quality, in addition, indicates the effective capacity of any organization or country to create new ideas or adopt modern technologies for the production of goods and services. No euro of spending could actually produce anything, unless there are the right people who could actually engage in research. As a result, education or training programs are of first order importance to country’s growth and key factor determining the subsequent effectiveness of RD spending.

From the above it follows that there a host of policies a government could introduce in order to maximize the potentials of RD expenditures.  Some of the most important relate to the regulatory framework covering business operations, barriers to trade or investment, while is also important to look at what the government itself does to assist businesses to secure RD funding or how much money itself allocates in research.  

When, for example, a government sets the price of a product or service (State control) this could distort the incentives of corporations to engage in RD development and, therefore, diminish the growth potentials. This is because, the operating costs and profitability of firms are likely to be adversely affected, and in order to remain in business may reduce their incentives to engage in RD activities. Similarly, any barriers to trade or investments or other barriers that makes harder to set up a business, would most likely diminish the pace of innovation. For example, in lot of cases knowledge spillovers are actually occurring through trade or foreign investments that facilitate an exchange of “know-how” between local sectors and the rest of world. Therefore, any barriers such as tariffs that reduce international trade or investment activity are likely to diminish the interference of the local economy with the outside world and, by extension,  reduce the likelihood of innovations or adoption of advanced technologies. Respectively, when setting up a firm is quite hard, for example, due to extensive degree of bureaucracy, it reduces competition and therefor the incentive of the business sector to become more innovative.

Besides the regulatory environment, the government could facilitate RD spending using much more direct tools. In some cases for example the costs for firms to engage in RD activities could be particularly high, and although may have the required know-how or ability to engage in research, may lack the incentive to do so as the potential pay-offs from innovations may not necessary exceeds the potential benefits. In this case, governments around the world are subsidizing many of the RD expenditures that are actually undertaken by private organizations. Respectively, a government, most often through public universities, are allocating a substantial amount of money in RD expenditures. Since profitability for public sector is of less concern compared to the private sector, experimentation is more easily facilities and therefore the likelihood of innovation increases when a government increases its public RD spending. Historically, for example, many well-known innovations were the actual results of such governmental activity. Finally, and given the prominence of human capital, government expenditures on education or life-long learning or training programs are also important, as they increase the likelihood of creating new ideas or improve the capacity of the labor force to adopt new technologies.