Innovation, manufacturing and R&D: where to invest?

There is no doubt that in the long run R&D is an important driver of economic growth. In advanced economies, growth is increasingly innovation-driven and R&D is a key factor in developing and applying the new technologies that underpin many of the industries so crucial to economies’ competitiveness.

On a macro-level, the positive impact of R&D on growth is undeniable. Research points to a longer time return of nearly €2 to every euro invested in R&D. In addition to this, economies greatly benefit from research embodied in the machines and systems they buy. This can add another €0.8 to the returns. On a micro level, the growth outcomes of R&D are more varied and influenced by factors other than the level of investment in R&D, such as quality of management. It is also widely accepted that private research investments generally have spill-over effects far beyond the company directly engaged in R&D. It is evident therefore, that in the long run R&D investment benefits competitiveness, growth of companies and overall economic growth.

Knowledge and know-how have become important factors of production in this area. In fact, it has been proven that productivity rises when new technology lowers the demand for material and labour investments. This high productivity strengthens competition and helps industries and countries build up a leading position in world trade. Innovation also has a notable impact on social conditions (including better healthcare, a cleaner environment and better security) and it generally leads to higher quality jobs.

Investing in R&D and in the application of new technologies does not, however, necessarily lead to more jobs in the investing sector. On the contrary, there is ample evidence that as our industries become more productive and more competitive, they need less labour per product. But history teaches that at the same time, entirely new industries and economic activities appear. Recent OECD work points to the fact that even during the crisis, new firms kept growing whereas older firms generally reduced their labour force. Certainly in the developed economies of Europe and the United States, these countries face excessively high levels of unemployment after the past six years of economic crisis. Yet it has become a very popular political remedy in these situations to try to increase the role of industry (eg. manufacturing) in our economies.

Both the EU and U.S. have high ambitions in this regard. The EU, for example, has set targets to increase the contribution of industry to GDP from 16 to 20% of GDP, grow the market share of the EU semiconductors industry from 10 to 20% while creating 250,000 new jobs (90,000 of those in the booming biochemical industry alone). Reaching these targets will, however, require growth of many new industrial activities, together with an increase in the competitiveness of existing ones in highly competitive global markets. If we are working on the assumption that trade practices around the world will gradually lead to a level global playing field, then R&D-driven technological capabilities will become an increasingly important factor in building and improving long-term competitive industries.

The private sector, however, cannot do this alone. It needs long-term public research for sustained growth trajectories. There is growing evidence that long-term government commitment (and funding) to new and promising technological trajectories is of critical importance, and that the private sector contribution to R&D investments should be higher than the public one to achieve a good growth impact. But the relations between public and private research are rather complex. Debates focus on issues such as: finding the best balance between public and private research; to what extent public research can generate research-driven entrepreneurship (start-ups); whether or not public research can accelerate private R&D; and exactly how much private research interests should drive the agenda of public research.

Since we have begun studying innovation and competitiveness, there has been a broad understanding that research alone is not enough for a country’s successful innovation performance. Applied research and development, design, education, market development, the quality of organisation and management, well-skilled users, etc. are all just as important. So simply investing more in research (especially in academic research) will not be enough for a good innovation policy.

With budgets under pressure, politicians in Europe and the U.S. are now facing difficult choices with regards priority-setting. Where can we best invest our limited resources to fuel growth? It should be expected, for instance, that investments in certain fields of R&D will have a higher impact than others, and that investments in some countries or regions are more successful than others. A strong existing ‘stock of knowledge’ – as can be found in the major high-tech cluster regions and in advanced knowledge economies – generally increases the growth impact of additional investments (in other words, “success breeds success”).

This, however, poses another difficult choice for politicians: should we invest more in areas which are already successful (the important high tech cluster areas) because it increases our chances of success? If that were the case, would it mean we are facing a Europe with a limited number of ‘peaks’, a few large agglomerations (‘mega-regions’) of intense economic activity? Peaks are generally characterised by the highly interactive presence of a number of internationally leading companies, a wide range of SMEs, highly educated people, advanced services, good linkages with excellent science, a good applied R&D and design sector.

A stronger focus on the growth of advanced and globally competitive manufacturing might have a positive impact on employment growth (though not in the manufacturing industry itself). The production and use of advanced manufactured products is a driver for innovation in many other sectors, because it requires high quality inputs (logistics and other services), requires well-paid jobs, and the final use of the products often comes together with the development of new advanced services (like the gaming industry).

Another generalised research finding is that €1 invested in manufacturing leads to more than €1.5 investment in other sectors. Very often, these other sectors are much more labour-intensive than the manufacturing itself. So we may expect that employment is mostly generated elsewhere, often in non-R&D performing sectors. Typically, such impacts will be strongest in the “peak-regions” where the interaction between R&D, services, manufacturing and other activities is high.

For the time being, therefore, it may indeed be sensible to support these agglomeration tendencies, but also try to lay the seeds for new and future agglomerations through well-targeted, long-term committed investments in new technologies in a small number of promising regions in Europe. It is not necessary to focus on the R&D-intensive high-tech sectors. In several countries/regions there might be a lot to win by focusing more explicitly on the knowledge-intensive segments of low-tech sectors (e.g. construction or food). Technologically weak countries can catch up by using intensive cross-border knowledge transfer supported by foreign direct investment and traded technology (machines and systems with embodied R&D).

To summarise, an increase in R&D investment seems to be a necessity. What Europe needs is an effective, growth-oriented R&D and innovation policy that builds on longer term committed investments, is aimed at strengthening existing (and building a number of new) “peaks”, and addresses not only R&D but the full scope of innovation. In particular, Europe should seek to steer away from pressure to “protect the old” and should focus more on creating more new activities and new firms. For example, new technologies in advanced manufacturing such as 3D printing provide ample opportunity for a diverse range of new activities and firms, including the growth of related services and the much needed employment growth.