Federation of Asian Chemical Societies (FACS)

  Last updated on 26 Oct., 2004      

The role of public sector research in the economic development of nations

T. H. Spurling FRACI, FFACS, FTSE Industrial Research Institute Swinburne,  Swinburne University of Technology,  PO Box 218, Hawthorn, Victoria, 3122, Australia

Abstract
Introduction
An historical perspective
Developments outside Europe and the USA
The structure of FACS members’ economies
Economists views on publicly funded R&D
How have the PFRI in our region performed?
Conclusions and recommendations
References

Abstract

There is widespread agreement that innovation is the driver of every modern economy and that the cycle of innovation must be fed by new basic knowledge generated within a system that allows it to be transferred to and accepted by end users. There is less agreement concerning the role of governments in driving this process and in particular the role of publicly funded research institutes in the process. This paper will review this role in both developed and developing economies and make some recommendations for policymakers in the countries that are members of the FACS.

TOP

Introduction

There is agreement around the world that science, engineering and technology underpin the development of a prosperous, responsible and cultured community. Governments in most of the 208 countries of the world invest some of their resources in scientific and technological research. They do this in the expectation that this will result in social and economic gain in the medium or long term.

There is also widespread agreement that innovation is the driver of every modern economy and that the cycle of innovation must be fed by new basic knowledge generated within a system that allows it to be transferred to and accepted by end users. As trade between countries becomes freer the countries that do not invest in innovation will fall behind those that do. Policy makers in most countries agree that the private sector has a vital role to play in the innovation cycle and have developed policies to encourage private investment in science, engineering and technology. 

There is less agreement about the role and value of publicly funded research in driving economic and social change. This paper will review this role in both developed and developing economies and make some recommendations for policymakers in the countries that are members of the FACS.

TOP

An historical perspective

In a 1993 study sponsored by UNIDO, the Higher Council for Science and Technology and the Islamic Foundation for Science and Technology Development, Martin Bell [1] observes that both the term research and development and the activity as we know it did not exist in the nineteenth century. Innovation and technical change in industry were the result of trial and error and slightly more formalised engineering usually carried out by employees with other responsibilities. All of this activity was, of course, closely connected to production.

In the first decades of the twentieth century some of the larger firms in the chemical and electrical industries in Europe and the USA had developed specialised facilities devoted to R&D. By the start of the Second World War firm based R&D laboratories were contributing to technological developments in many industries. This trend has continued in the last fifty years with private investment in research and development outstripping public expenditure in most of the OECD countries.

Governments in those Europe and the USA did build their investment in research during the last century. Much of that investment was in areas of direct concern to governments such as metrology, meteorology and defence while a considerable proportion was in pure basic research carried out in universities in connection with the training of students. 

TOP

Developments outside Europe and the USA

Commencing about 50 years ago, most of the countries that are represented in the FACS began to build their own industrial R&D capacity. This capacity was not built up in the private sector closely connected with production. It was instead built up in publicly funded research institutions with little design, engineering and production activities.

The consequence of this historical origin became apparent in the 1970s as governments and international agencies started to discuss ‘disconnects’ and ‘gaps’ between the research of publicly funded research institutes and the needs of the economy. Policy makers and commentators also identified ways of addressing the problems.

In his paper Martin Bell has analysed the various approaches to integrating R&D with industrial production and technical change that have been used in various countries. He suggests that none of these have worked and that more radical approaches should be contemplated.

He identifies four ways that have been used for developing linkages within existing structures:

• Integration via planning and improved allocation of resources. This approach assumes that there is little inherently wrong with the R&D system or with industry. All that needs to change is the orientation of the R&D undertaken. R&D plans were constructed that should meet the ‘needs’ of the industry. This was a supply driven plan and seldom worked.
• Integration via organisational and managerial ‘change’ on the supply side. Once again it was assumed that there was little wrong with the system and that the problem was with the organisation, management or structure of the R&D institute. Bell suggests that these approaches also did not work. That may be so; however, the changes introduced probably improved the R&D institutes.
• Integration via changes in the policy environment influencing industrial demand for R&D. This approach locates the source of the problem in the behaviour of the firms that generated weak or non-existent demand for local R&D outputs. As discussed below Australia has used this approach with more success than Bell credits.
• Integration via bridge building between institutes and firms. This approach says that if there is a gap then it should be filled! Bridging mechanisms often in the form of technology transfer companies or technology brokers were set up. They usually did not survive for long because when the firms did want to interact with the R&D institutes they wanted to do so directly not through an intermediary. 

Bell argues that none of the above approaches will work in the long run because the structure is fundamentally flawed. He suggests that since in the original model R&D was closely integrated with production the R&D institutes should ‘spin in’ to companies (either existing or start up). 

Bell is correct that that there is a flaw in the structure, however, the experience of CSIRO in Australia, CSIR in India and LIPI in Indonesia suggests that the concurrent implementation of the four approaches does result in an improved collaboration between publicly funded research institutes and firms. 

Bell’s analysis is based on the dynamics in the manufacturing sector, and therefore does not give a complete picture of the role of R&D institutes in both industrialised and industrialising countries. It is not only in the manufacturing industries that R&D has some relevance. Modern economies have problems in agricultural production, environmental management, mining and energy and in understanding social problems that are never going to be solved in private R&D laboratories. The welfare contribution in these cases will often be in terms of reduced environmental and social impacts and avoided damage to health and amenity. While these are not always easily quantified in economic terms they are nonetheless real and often sizeable. Many of these problems require whole of system solutions. R&D institutes like LIPI (Indonesia), CSIR (India) and CSIRO (Australia) are in a good position to contribute to the solution of those problems. In addition the era of globalisation and free trade has meant that no country will be able to neglect the development of new technologies.

TOP

The structure of FACS members’ economies

Before discussing further the role of the PFRI we should remind ourselves of the size and structure of the economies of the nations that comprise the FACS. The size of the economies is important because of the expense of carrying out modern research in science and engineering, and the structure is important when considering the research programs of the PFRI.

There are three tables below [2]. Table 1 shows the structure of the output for 2000 for the 26 countries in the FACS for which data are available. Note that the category ‘industry’ includes ‘manufacturing’. Table 2 shows the latest available data for the structure of manufacturing for the same countries. Information in these two tables is defined as follows.

Gross domestic product (GDP) at purchaser prices is the sum of the gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Value added is the net output of an industry after adding up all outputs and subtracting intermediate inputs. The industrial origin of value added is determined by the International Standard Industrial Classification (ISIC) revision 3. Agriculture corresponds to ISIC divisions 1-5 and includes fishing and forestry. Industry comprises ISIC divisions 10-45 and includes mining, manufacturing (ISIC divisions 15-37), construction, electricity, water and gas. Services correspond to ISIC divisions 50-99 but are derived as a residual.

Table 3 shows the % of GDP spent on R&D for the countries for which such data are available. The data on the % of GDP spent on R&D are the latest available. Note that the total spent on R&D by nations in this region is about US$165 billion. This is dominated by the $US 135 billion spent by Japan, but is less than the $US 251 billion spent by the US.

The first observation on these tables is that of the twenty six countries listed only two have GDPs greater than $1000 billion and only five are greater than $250 billion. The world expenditure on R&D is 2.12% of the world GDP. For the upper middle income countries it is about 1% of GDP. So a country with a GDP of $50 billion is unlikely to spend more than $0.5 billion on R&D. Note that this is considerably less than is spent by many of the multi-national companies in the chemical, pharmaceutical and automotive industries. That company expenditure is highly focussed on the needs of the company. Likewise expenditure on R&D in small and medium sized countries should be focussed on the needs of their economies if the taxpayer’s money is not to be dissipated on too many sub-critical projects.

The second observation is that while some of the countries have economies dominated by manufacturing and services, most of the countries in the FACS have economies which are dominated by agriculture and manufacturing.

The third observation is that the percentage of GDP spent on R&D in most of the countries is very low. Only 6 of the countries spend more than 1% and only 3 more than 2%. Private expenditure on R&D is not widely reported for countries outside the OECD. For countries in the FACS private expenditure and is only greater than Government expenditure in Japan, Singapore, China and the Republic of Korea. Private expenditure on R&D in the other countries is estimated to be quite small.

Table 1

Table 2