Grant for innovation: focus on effectiveness

Innovation subsidies among Dutch companies: the figures

EUR 20 billion. This is how much the Dutch government was planning to invest between 2021 and 2025 in large-scale investment projects and programmes to ensure long-term economic growth. But recently, the handbrake was abruptly applied. The National Growth Fund is currently on hold, and it is unclear what will happen to the programme.

It is indicative of the debate in our country on how R&D should be stimulated in the Netherlands, because we have a problem: we spent only 2.3% of the GDP on R&D in the Netherlands in 2022. This is significantly less than Germany (3.1%) and Belgium (3.4%), and far below the 3% target that all EU countries, including the Netherlands, agreed to back in 2000.

Corporate R&D subsidies unfair?

What is striking is that discussions about R&D funding can easily get heated in our country. ‘A common argument is that subsidies for private R&D are unfair. This shows that there is a strong focus on the efficiency of such spending. But it doesn’t help to look at it that way’, Marcel de Heide believes.

As an economist researching innovation policy at TNO Vector, he decided to put his emotions aside for a moment. And, based purely on economic theory, to shed more light on the role of subsidies for private R&D in strengthening the innovative capacity of Dutch businesses.

Effect of R&D subsidy only clear after a longer period of time

‘The tricky thing is that you can’t calculate exactly what each euro of R&D subsidy ultimately yields’, he explains. ‘There are many uncertainties involved in innovation processes, which means that not every R&D project leads to the desired results. And usually the effect only becomes apparent in the longer term. After a decade or so, for example.’

It is impossible to give ‘just enough’ subsidy

Companies make their own trade-offs when deciding how much to spend on R&D. If the government offers to take on part of that expenditure, this obviously has a threshold-reducing effect. In doing so, the government does not know whether the company was willing to take up the challenge and fund a large part of the R&D expenditure. Or whether the R&D project only became a serious option because of the subsidy.

‘Essentially, any R&D subsidy is more than the amount you could have used to win over a company’, De Heide points out. ‘The subsidised amount can exceed that threshold by a little or a lot. This also explains why, in discussions in the Netherlands, you regularly hear that these subsidies are unfair. But giving just enough? That is impossible. After all, you cannot determine the exact amount of money needed to persuade a company to start an R&D project.’

R&D subsidy provides additional research and innovation power

Another point that De Heide says is underexposed in the current debate is the fact that R&D subsidies trigger additional private spending anyway. ‘If companies use part of the subsidy to avoid making some of the investments they had already planned, we regularly see them using the extra money for additional R&D that would never have got off the ground otherwise. Again, it is not possible to calculate the exact scale of this effect in advance. On the other hand, it is certainly not far-fetched to assume that the extra spending leads to additional innovations, and thus more innovation power.’

The Netherlands needs innovation power to remain competitive

‘And more innovation power is exactly what we desperately need in our country right now’, he stresses. ‘In many areas, we need to speed up knowledge development enormously if we are to remain competitive in the long term. It will not help if the Netherlands continues to focus blindly on the most efficient possible subsidy policy when it comes to R&D spending. This is a disincentive, whereas a policy that gives companies an extra incentive to do more R&D is much more helpful. And not just temporarily, but continuously, because innovation is not something that can be stimulated temporarily and then left to its own devices.’

Focus on effectiveness of ‘innovation premium’

While it seems only logical to look at how efficiently public money is spent, De Heide concluded that there are other issues at play in R&D spending that weigh more heavily. ‘It’s not so much about how efficient an R&D expenditure is, because you can argue endlessly about that, but how effective that expenditure is. When you focus on effectiveness, you have very different conversations and come to different decisions. I would propose that government co-financing of R&D expenditures should no longer be called a subsidy, but rather, an “innovation premium”. Because that is what it actually is.’

For economists who want a bit more depth, Marcel de Heide has written a (Dutch) paper for the ESB. In this paper, he visualises why it is so difficult to determine the efficiency of government co-financing of private R&D.