FOLLOW-UP TO SCIENCE POLICY RESEARCH UNIT REPORT TO TREASURY

  This response relates to research in the general area of the relationship between publicly funded research and economic performance. The Economic and Social Research Council has funded research on the relationship between publicly funded basic research and economic performance in the following centres. In the short time available, it has not been possible to do a comprehensive review of all the research funded in this area but the following examples will give an indication of some of the research which has been carried out recently, funded by ESRC and other funders.

RESEARCH AT THE SCIENCE POLICY RESEARCH UNIT

  The Treasury report written by SPRU itself reflected a stream of work which has been going on under the ESRC Centre for Science, Technology, Energy and Environment Policy which was established at SPRU in 1992 by the ESRC with funding of £2-£5 million over five years. The ESRC in making this award decided that it would be the final phase on a long period of support for the Centre. Since ESRC core funding ceased in September 1997, some of the research has continued to be funded by the EU (TSER) and individual ESRC projects. Relevant research projects include:

  The Changing Shape of British Industrial Research. Diana Hicks and Sylvan Katz developed their research based on the Bibliometric Evaluation of Sectoral Scientific Trends (BESST) database which tracks UK scientific publications back to 1981 and enables detailed analysis of institutional and sectoral trends. They demonstrated that in the UK companies make regular and systematic contributions to the science literature. They show company research to be as highly collaborative as that of other institutions. In the life sciences, company research is more highly cited than academic research. In a world in which information and knowledge are increasingly recognised as being important corporate assets, they suggest that one of the most important reasons why companies publish is to send signals of technical credibility into a system where economic activity is increasingly knowledge-based and technical competence highly valued.

  Hicks and Katz have also used their database to probe the science and technology relationships in industry, analysing the networks through which skills and knowledge are exchanged. These informal networks of "knowledge exchange" exist neither within the market system nor are internalised within the firm, but have been empirically proven to facilitate innovation. Those two researchers used co-authored papers as indicators of the networks underpinning science and technology links; using 14 years of co-authorship data to examine the UK system of informal industrial links the results show that industrial sectors differ greatly to the extent to which they network with university researchers. Nevertheless informal networking increasingly characterises industrial research. This suggests that industry, a site where research meets application, finds it worthwhile looking across the research system to pull in the knowledge and resources necessary to underpin its activities. The Centre also studied:

—  Barriers to collaboration in hospital research;

—  Bibliometric parameters as a measure of scientific activity;

—  Does public funding of R&D crowd out private R&D?

  von Tunzelimann has been working with Martin on econometric work investigating the "Kealey Hypothesis" that public funding of R&D "crowds out" private funding and thus cutting government expenditure will actively boost total R&D. Their findings to date strongly reject this hypothesis. Indeed they indicate that government R&D is just as likely to "crowd in" industrial R&D namely to cause it to expand. They also find some evidence of a "reverse causation" by which changes in industry-funded R&D lead to offsetting responses by the government.

Academic Research, Technical Change and Government Policy

  Pavitt has continued to explore issues connected with the benefits to be gained from basic research and the rationale for government support. Pavitt in his paper "National Policies for Technical Change" attacks mainstream economics for failing to recognise the importance of tacit knowledge transfers. He suggests that institutional competencies (eg in firms, government agencies) are just as important as incentive structures in explaining successful performance.

Patterns of Internationalisation of Corporate Technology

  This research has suggested some evidence to support the view that firms are increasingly engaging in small scale activities abroad in order to monitor and scan new technological developments in centres of excellence in foreign countries.

The Science Base and Locations Decisions

  Pavitt's research leads to the conclusion that continuous technical change in modern business firms requires the proximity of a strong, publicly-funded research base and associated training facilities. He goes on to argue that traditional national linkages between technological activities and the underlying science base are under increasing strain.

Overseas Biotechnology Research by Europe's Chemical-Pharmaceutical Multinationals

  SPRU research (Senker) shows that while European small biotechnology companies may be starting from a lower base than their US counterparts, changes in regulation, an easing of financial constraints and increased collaboration between companies and universities are beginning to close the research and industrial gap between Europe and the US.

The Nature and Dynamics of Knowledge Creation in Firms

  d'Adderio has researched on how organisations acquire and use knowledge in the innovation process. Several in-depth case studies on firms' product development activities have revealed the significant influence that advanced software technologies are now having in shaping the information and knowledge processes in product development.

The Technology Strategies of Europe's Large Firms

  Patel has found that Europe's multinationals are more internationalised than their US and Japanese comparators in that they perform more of their corporate technological activities outside their home country base.

Multi-technology Firms

  An increasing diversity in the technological competencies of large firms is caused by firms needing a broad range of competencies to handle/co-ordinate change in their supply chain of components, materials, etc. Firms also need to explore and assess new opportunities. Both help to explain why increasing product focus can go hand in hand with growing technological diversity and increasing external linkages.

ESRC CENTRE FOR FISCAL POLICY, INSTITUTE OF FISCAL STUDIES

  New data on fiscal incentives for R&D has enabled centre researchers to study the effects of accounting and tax regimes on tangible and intangible investment in eight countries over the last 15 years. This research suggests that fiscal policies had important effects in stimulating domestic R&D spending, and may also cause substantial relocation of R&D from other countries. The impact of the introduction, or reform of fiscal incentives for R&D in the UK, France and Germany has been stimulated.

  The Centre is continuing its work in examining the role of financial constraints on investment by examining relationships between company R&D spending, physical investment and finance in both Britain and Germany. Changes to accounting requirements in the late 1980's in both Britain and Germany allow this to be studied using micro data for the first time. German firms invest more in R&D and it is often argued that this stems from the longer term horizons of investors and managers. Preliminary results suggests that the behaviour of UK and German R&D performing companies is more similar than is often believed.

  An important dimension of the Centre's research into innovation is the impact of technical change on the labour market. There has been a rapid shake-out of low skilled workers in the advanced countries which many writers have associated with the computer revolution. In a four country comparison Centre research corroborates the importance of technical change but we also find that institutional changes in the labour market (especially in Britain and the USA) have a very important role in accounting for the upgrading in skills.

ESRC'S RESEARCH IN THE FINANCIAL MARKETS CENTRE, LONDON SCHOOL OF ECONOMICS

Financing Innovation

  There has been much discussion about the importance of innovation to the overall competitiveness of the UK economy. The research undertaken at this Centre, under the auspices of the ESRC Innovation Project, has addressed one potential source of hindrance to innovation in the UK, namely the potential for the financial markets to misallocate financial capital to firms which conduct research and development. The project began in October 1994 and its goal has been to provide empirical evidence on potential financing problems faced by innovative firms in the economy.

  The theory motivating this research concerns failures in financial markets arising from problems of asymmetric information. The thrust of this literature is that the price mechanism may fail to efficiently allocate financial resources if the suppliers and demanders of finance have different information about the expected future returns to the investment projects for which finance is being sought.

  There are two main empirical implications of financial market failure: first, expenditures of innovative firms will be more sensitive to fluctuations in the amount of available internal finance; second, innovative firms may require a high degree of market power in order to generate profits sufficiently high to finance ambitious research and development programmes. The latter implication was originally hypothesised by Schumpeter, who used it in defence of monopolies.

  An analysis of the physical investment expenditures of a number of firms over the period 1970-1993 showed that the investment expenditures of high R&D intensity firms were more sensitive to fluctuations in internal finance than those of low intensity firms. These results are consistent with the first of the above implications of financial market failure.

  The second implication of financial market failure, Schumpeter's hypothesis was tested. The results indicate that market power is an important determinant of investment of firms which are R&D leaders within an industry.

Centre for Business Research

  The ESRC funded Centre for Business research is carrying out work relevant to five aspects of the areas highlighted by the SPRU report:

—  Technology Transfer from the Science Base

—  Territorial Clustering and innovative Millieux

—  SMEs and the Innovation Process

—  Networks. Collective Learning and RTD in Regionally Clustered High Technology SMEs

—  Surveys and Database Management.

Technology Transfer from the Science Base

  Moore and Howells are investigating the extent to which the commercialisation of academic research has been successful in improving the competitive advantage of industry, and in particular to identify which modes of technology transfer and exploitation result in sustainable alliances and collaboration to the benefit of both parties.

  The research will also assess the nature and extent of benefits to universities and the importance of a mutuality of interest in raising benefits and focus on which modes of technology transfer and commercialisation result in sustainable alliances and collaboration to the benefit of both parties, and which result in disjuncture. The relative importance of intellectual property rights, dominant design and market power and complementary assets, will be assessed for each of the case studies.

Territorial Clustering and Innovative Millieux

  Moore, Keeble and Wilkinson are investigating the extent and nature of local inter-firm relationships and networks and addresses the questions of how far the core characteristics of the "Innovative milieu" apply to research-intensive firms in the Cambridge and Oxford regions.

  They are studying the nature of the dominant technological, information, research and development and other linkages between firms themselves and between firms, research institutions and other private and public sector bodies in these two regions. The position of these firms within vertical supply chains, and the nature of local horizontal linkages in the areas of training and information-sharing, are central questions for study. A related question concerns the local activities of large national and multi-national firms and whether by locating part of their operations in Cambridge or Oxford and by their acquisitions of local firms they have restricted the extent and nature of regional provision of products and services which are external or internal to the firm; French research has highlighted the importance of this question.

SMEs and the Innovation Process

  Cosh, Hughes and Keeble are investigating the role of SMEs in innovation. They have found that systematic high quality research on the role of SMEs in innovation has been hampered both by lack of data and by definitional problems. (Less than 150 replies were received in the UK section of the recent European Community Innovation Survey (CIS) organised by SPRINT/EIMS and EUROSTAT.)

  The project is also developing a small number of selected case studies of firms who have maintained their innovative activity over the whole period 1987-95 and those who have not,. This will be complementary to a set of detailed studies of growth amongst a small number of our survey sample recently completed for the DTI as part of the Growth Constraints on Small and Medium Sized Enterprises project.

Networks, Collective Learning and RTD in Regionally Clustered High Technology SMEs

  This European research network, which is co-ordinated and organised by Keeble and Wilkinson on behalf of the ESRC Centre for Business Research, brings together 11 European research teams from eight countries to study the role and importance of regional and European-wide research and technology linkages and networks in the evolution and competitiveness of regional clusters of innovative high-technology SMEs.

  Specific questions which are being investigated and discussed at a series of Network meetings held in different European locations over the three years of the Network's activities are:

—  how are these different regional clusters of technology-intensive SMEs evolving in the 1990s, and is it possible to identify more or less successful evolution trajectories in different regions?

—  how important are local, European and international research and other linkages between SMEs for successful technology-intensive SME development in these clusters?

—  how important are linkages between SMEs and local universities/public research institutes in these clusters, and what role do such linkages play in their development?

—  what impacts do large firms have on the development of these technology-intensive SME clusters?

—  what is the nature of, and how important for successful SME development are, "collective beaming" processes operating within these regions, and particularly their scientific and professional labour markets?

CONCLUSION

  This short review has indicated some of the relevant research which is, or has been funded by the ESRC. Not all the topics suggested by the SPRU report have yet been researched. The pressure on ESRC funds is such that only a small proportion of the high quality researchers wishing to study topics of such high priority and interest are able to be supported.