How to do public R&D spending in times of budgetary austerity

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The high debt and deficit burden in some EU countries leaves no choice but to continue the course of fiscal consolidation. At the same time, the growth performance in the EU remains subdued.  The dangerous cocktail of high debt and low growth calls for smart means of public investment.  The search is for public investment that fosters long-term growth while at the same time minimise the potentially negative short-term effect on public finances and economic activity. R&D is an area typically identified as a candidate for smart spending, because of its growth effects.  What is the case to be made for public expenditures on R&D?  Is this an area of smart spending in times of low growth-weak public deficit?

Identifying R&D spending as an area of smart government spending requires several issues to be cleared.  A first question is:  does R&D contribute to growth?  At present, it is widely acknowledged that innovation is an important force behind long-run economic growth.  Particularly the models using an endogeneous growth framework make a strong case for the growth power from R&D and innovation (eg Aghion (2006), Conte (2006)).  But this does not yet make the case for public R&D investments.  Will public R&D lead to innovation and growth, sufficiently to cover the opportunity costs of using public funds for R&D? To address these questions, we review the evidence and analysis on the impact of public R&D spending.  We first look at the evidence from micro-analysis of the impact of public intervention on private R&D and innovation, with a special focus on the latest results from cross-country micro-research performed within SIMPATIC.   To analyse the impact from public R&D on growth, we need to take a macro-perspective.  To this end, we look at how public R&D performs in affecting GDP growth and jobs in applied macro-models most commonly used in EU policy analysis.  We focus particularly on the NEMESIS model in development within the SIMPATIC project.  We conclude with some policy recommendations from the reviewed micro and macro (SIMPATIC) evidence for designing public R&D projects and programs.