What does the retreat of public research mean for welfare and innovation?

This article was written by Professor Daniele Archibugi and Dr  Andrea Filippetti, from Birkbeck’s Centre for Innovation Management Research

research-and-developmentAn increasing proportion of knowledge is generated in the private sector, rather than in public research institutions like universities.  For many, this is cause for concern; public research and private research differ economically in terms of public access, potential for future technological innovations and in the criteria of resource allocation. Does it matter whether research is conducted by  private business rather than in universities or government research centres? And will the retreat of public research have negative effects on welfare and innovation?

These are just two of the questions we considered in our recent research . While science and innovation policy in the last decades has focused on exploring the relevance of the interconnections between public and business players in enhancing knowledge-based societies, we argue that a major trend has been ignored: both the quota of public Research and Development (R&D) and its share over the total R&D investment has shrunk in most OECD countries.

The shift from public R&D to business R&D

The evidence for a shift in R&D is reflected in the most visible and measurable component of knowledge creation –  the resources allocated to R&D. In most OECD countries a significant shift in the effort to finance public R&D has occurred: as shown in the tables below, from 1981 to 2013 the share of public-financed R&D to GDP has been reduced from 0.82 per cent to 0.67 per cent. By contrast, the industry-financed R&D has increased from 0.96 per cent of GDP in 1981 to 1.44 per cent in 2013.

Gross R&D (GERD) expenditure as a percentage of GDP by source of funds (G-7 countries plus South Korea and OECD average), rate of change 1981-2013

Industry-financed GERD as a percentage of GDP Government-financed GERD as a percentage of GDP
rate of change 1981-2013 rate of change 1981-2013
Canada 53.06% -6.56%
France 63.16% -21.21%
Germany 38.81% -13.27%
Italy 33.33% 38.46%
Japan 85.82% 15.38%
South Korea* 86.90% 126.19%
United Kingdom -19.15% -59.26%
United States 48.21% -29.63%
OECD – Total 50.00% -18.29%

Source: OECD Main Science and Technology Indicators (MSTI).

*  Data for South Korea refer to 1995 instead of 1981.


Table 2 – Percentage of Gross R&D (GERD) expenditure by source of funds (G-7 countries plus South Korea countries and OECD average)


Percentage of GERD financed by industry Percentage of GERD financed by government
year 1981 2013 rate of change 1981 2013 rate of change
Canada 40.77 46.45 13.93% 50.61 34.86 -31.12%
France 40.92 55.38 35.34% 53.4 34.97 -34.51%
Germany 56.85 65.21 14.71% 41.79 29.78 -28.74%
Italy 50.08 44.29 -11.56% 47.21 42.55 -9.87%
Japan 67.71 75.48 11.48% 24.91 17.30 -30.55%
South Korea* 76.26 75.68 -0.76% 19.04 22.83 19.91%
United Kingdom 42.05 46.55 (70)** 10.70% 48.1 26.99 -43.89%
United States 49.41 60.85 23.15% 47.8 27.75 -41.95%
OECD – Total 51.64 60.76 17.66% 44.19 28.28 -36.00%

Source: OECD Main Science and Technology Indicators (MSTI). Data for South Korea refer to 1995 instead of 1981; the sum of the shares does not add up to 100% since there are other minor sources that are not considered, namely “other national sources” and “abroad”.

* Data for South Korea refer to 1995 instead of 1981.

** In the UK a significant higher proportion of R&D funding comes from overseas. When this is taken into account the share of private-funded R&D stands at 70% (Economic Insight, 2015, p. 7)


This data also indicates significant differences across countries. Japan and South Korea exhibit a virtuous trend where both  business and  government have increased their R&D expenditure; in South Korea, particularly, government expenditure increase has been spectacular. In the US, the UK, Canada, France and Germany, by contrast, we see simultaneously the growth of industry-financed R&D and  the decline of government-financed R&D.

Beyond the knowledge-as-a-public-good view

The current privatisation of research activity and knowledge (which is often praised) can have major consequences on innovation and, ultimately, on long-term economic growth and social welfare. But why is the threat to knowledge largely ignored or under-estimated?  We believe that it is due to an unclear understanding of the economic characteristics of knowledge. Historically, knowledge has been considered to be a public good; Nobel Prize winner in Economics, Kenneth Arrow, is cited arguing that knowledge is costly to produce but could be disseminated as information at zero or very low costs. While this view recurs frequently in literature, and is repeated by another authoritative Nobel Prize winner, Joseph Stiglitz, a great body of research has demonstrated that knowledge has both public and private components.

Public-generated knowledge and private-generated knowledge have different economic characteristics, which will shape future knowledge-creation and innovation. The way in which knowledge production is funded – public or business – matters for subsequent application for innovation, particularly in:

  1. Resources allocation
  2. Excludability in consumption
  3. Excludability in production
  Private-generated knowledge Public-generated knowledge


Resources allocated through market mechanism.

The main purpose is to contribute to profits though knowledge-based products, services and processes.

Resources allocated through political process.

The main purpose is to contribute to the advancement of knowledge and social welfare.

B. Excludability in consumption pursued through active strategies such as industrial secrecy and proprietary forms of intellectual property. Non-excludability in consumption implemented through technology transfer policies and full disclosure (e.g. open science and non-proprietary forms of intellectual property).
C. Excludability in production associated to firm-specific technical knowledge and tacit knowledge. Non-excludability in production actively sought reducing tacit knowledge.

Our research suggests that, up until now, little attention has been given to the major shift from public to private consequences. We are calling for a change: while the long-term consequences of this shift have not yet been discussed at length, they have the potential to be extremely relevant to long-term technological opportunities, the role of major scientific breakthroughs, and vital knowledge exchange from basic research in the public sector.

Further reading:

  • Archibugi, D. and Filippetti, A. (2016) ‘The Retreat of Public Research and Its Adverse Consequences on Innovation’. CIMR Research Working Paper Series Working Paper No. 31.
  • Archibugi, D. and Filippetti, A. (2015) The Handbook of Global Science, Technology, and Innovation, John Wiley & Sons.
  • Mazzucato, M., 2013. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Anthem Press, London.
  • I.T., 2015. The Future Postponed. Why Declining Investment in Basic Research Threatens a U.S. Innovation Deficit. M.I.T. Washington Office, Washington D.C.

Further information:

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Entrepreneurship in London’s Universities

This Thursday 28 June, as part of the School of Business, Economics and Informatics‘ annual Business Week, Professor Helen Lawton Smith will be holding an event on entrepreneurship.  Prior to the event, Professor Lawton Smith explained to us how university spin-offs in London are faring.

The Coalition government has recognised, in policy announcements and ministerial speeches, that the creation of new jobs and economic growth is key to the recovery of the UK economy. In both the UK and the USA, studies have shown that it is new companies, rather than established firms, which are leading the creation of new employment opportunities.

Universities, with their wealth of knowledge and highly skilled staff, have a lot of potential for commercialising their research through spin-offs. What’s more, London, a global city and home to 42 universities, offers an attractive environment in which to launch new spin-offs. Metropolitan regions, such as London, offer many advantages to the new spin-off: they attract a highly skilled workforce, the high concentration of large and international companies means there is a market for products commercialised by universities, and they provide resources in the form of services companies (offering technical, commercial and marketing know-how), physical infrastructure and strong telecommunications networks. Given that any fresh young company needs a market, a talent pool, and access to financial resources, London appears to be a highly attractive location.

However, Lawton Smith explains, one important factor for new companies is the support of regional knowledge networks. In large cities, including London, although resources may be available they tend to be accessed less by spin-offs than in other regions of the UK. Lawton Smith explains that, despite its obvious advantages, London’s ‘entrepreneurial system’ (networks, research universities, professional services and skilled labour) was not well developed, even by the mid-2000s. It seems that during this period, most London universities were not embedded in any networks, possibly, suggests Lawton Smith, due to the sheer quantity of organisations involved in London’s financial community. In smaller regions these sorts of networks may be more transparent, and easier to tap into.

This situation is beginning to change. Imperial College has launched a £300 million venture fund – Imperial Innovations – which was listed on the AIM stock exchange in 2006. Imperial Innovations, which already has equity holdings in 80 companies, is now looking to invest in other universities’ spin-offs.

Other promising advances include the London Development Agency’s (LDA) commitment in 2005 to improve the infrastructure to support university spin-offs in the capital; London’s Science and Industry Council now brings together players from industry, academia, finance and the public sector to promote London’s strengths in science, technology and design to a national and international audience; the London Economic Partnership (LEP), established in 2011 will be taking a broader approach to supporting innovation and enterprise; and the Regional Growth Fund (2011 – 2014) is also being directed towards support for entrepreneurs.

It is too early to tell whether these changes will have an effect on the number of university spin-offs which chose to launch and remain in London.  Currently more than a third of London university spin-offs leave London at start-up or a later date. Lawton Smith explains: “Applications of technological advances may take place outside London because of problems of supporting spin-off growth within the city. The regional impact of university spin-offs extends well beyond the metropolitan region.” Indeed, a map showing the location of registered offices of London university spin-offs shows that they are spread well beyond the capital.

In London, as across most of the UK, the number of university spin-offs has been increasing since 1997, and survival rates are increasing. However, the majority remain small. Indeed, 90% are micro enterprises or small enterprises (defined as having less than ten, or between 11 and 50 employees, respectively). In London spin-offs the average number of people per company is 12.7.  Lawton Smith argues that we cannot judge the success of these spin-offs solely on their size. She explains: “There may well be an optimal size of firm for certain types of activity, such as in the creative industries sector. To assess the value of these companies by measuring employment misses their value based on other criteria, such as technological advances.”

However, other success measures aside, if university spin-offs are to play a part in the UK’s economic recovery, the Government’s primary interest lies in their ability to create employment, and it seems that here university spin-offs do not compare favourably with corporate spin-offs, which expand at ten times the rate of their university counterparts.

Looking at the chemical sector (which has the third highest concentration of university spin-offs in the UK after pharmaceuticals and biotechnology, and software and computer services) Lawton Smith suggests that, “many spin-offs are launched as a vehicle on which to focus further research, rather than genuine attempts to set up spin-out companies which take invention to full commercialisation.”  Many of the companies which the Royal Society of Chemists looked at in a 2006 study were based on a single idea or patent, which meant that they had little hope of long-term viability.

Although few of the older spin-offs have reached a substantial size, the Lawton Smith et al study showed that those spin-offs which have shown the highest growth have been those with the most recent origin. 60% of those which achieve high growth do so within five years of incorporation. These companies are known as ‘Gazelles’. Despite this, only a small proportion of the 244 firms identified from 12 London universities in Lawton Smith’s et al’s study achieved high growth.

Although it is clear that there are areas where London’s universities could do more to support spin-offs, and that the capital offers challenges, as well as opportunities, to new companies, Lawton Smith says that there is positive news. High growth university spin-offs outperform other high growth firms by 0.8%. And survival rates are high, particularly for staff start-ups (using IP from the university but without university funding or support).

Lawton Smith concludes: “If the Government, LDA and LEP are truly dedicated to supporting innovation and entrepreneurship in London, then all the evidence shows that they need to provide sustained capacity building for dedicated entrepreneurial support systems. The advantages of co-location with the originating university will be outweighed by the disadvantages of a lack of accessible premises, networks and professional service firms unless the Government can meet the challenges it faces in this area.

“On a positive note, although small in size, London’s recent university spin-offs are showing strong growth and high survival rates. There are some grounds for believing that the future holds prospects for a greater impact of spin-offs on employment.”


This article was based on the research findings in the following papers:

London Higher Study Investigating Spin-offs in Science, Engineering and the Creative Arts among 12 higher education institutions in London by Helen Lawton Smith (Birkbeck), Dave Chapman (UCL) Peter Reid (LTN) Tim Barnes (Lodestone), Peter Wood (UCL), Saverio Romeo (Birkbeck) (March 2007)

Funded by London Higher.


Chapman, D, Lawton Smith, H, Wood, P Barnes, T and Romeo, S (2011) Entrepreneurial Academics and Regional Economic Development: the case of spinoffs from London’s Universities, Industry and Higher Education 25, 6 483-492

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