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Govt R&D in energy: Money well spent?

   August 17, 2017        1284        TILAK K. DOSHI/Kathmandu

Government-funded research and development (R&D) in “clean” and “renewable” energy is central to the debate on what governments can do to promote energy security and mitigate and adapt to climate change.

Clean energy R&D in Singapore has received a substantial boost in recent years with several government agencies providing generous funding. Singapore is pursuing growth opportunities in solar energy, biofuels, fuel cells and energy-efficiency improvement programmes. Singapore’s long-term goal in achieving total (government and private) R&D spending at 3.5 per cent of gross domestic product will place it among top-ranking countries such as Israel, Japan, Sweden, Finland and South Korea.

Given that “basic science” is a “non-excludable” public good, its results cannot be commercialised by profit-motivated private enterprise. There is thus a tendency to under-invest. The call then is for government to step in to rectify this market failure. Hence, governments need to fund basic science to ensure that it receives sufficient investments from society’s point of view. In this view, the private sector then steps in to invest in “applied science”, which in turn generates new inventions, technological breakthroughs and commercial success for the firm’s shareholders.

But this simple view suffers from complications. It is not clear if there is a neat divide between “basic” and “applied” science. For instance, the US Bell Labs’ work on solid state physics (the transistor) in the 1960s and 1970s was far in advance of what any university in the world had to offer. Indeed, there are many examples where industry leads academia in driving fundamental research, be it Google’s search algorithms or Amazon’s cloud computing ambitions.

Academic science plays a relatively small role in technological advance. According to economist Edwin Mansfield’s survey of academic research and industrial innovation published in 1991, of 76 major American manufacturing firms in key industries such as information processing, electrical equipment, instruments, chemicals, drugs, oil and metals, “about 11 per cent of new products and about 9 per cent of all processes could not have been developed, without substantial delay, in the absence of recent academic research”. That is, about 90 per cent of technological advance arose from industrial R&D in business laboratories, not in academic science departments.

In reality, there is a two-way flow between “basic science” and “applied science and technology”, reflecting the cross-fertilisation between the two types of science, and much of private sector R&D is basic science done in industrial labs. Government investments also flow into the “applied science and technology” end of the research spectrum, as policymakers aim to get measurable results in increased productivity and higher economic growth.

Perhaps the most cited example in government-sponsored R&D is the role of Japan’s Miti or Ministry of International Trade and Industry, now renamed Meti or Ministry of Economy, Trade and Industry.

A peer-reviewed Harvard study of Miti policies during the years 1955 to 1990 across 13 major sectors of the economy concluded that Japan’s civil servants almost invariably chose and supported “losers”, and Japan’s industrial policies may have hindered rather than advanced Japan’s export successes. In another study done by the Organisation for Economic Cooperation and Development, the analysis found evidence that the impact of public sector R&D on economic growth was unexpectedly negative. The study found that business R&D, not government R&D, led to economic growth, and that government R&D could have displaced business R&D at the margin.

To minimise losing bets, modes of government funding need to be “competition friendly”. One way is to exploit complementarities between private and public co-financing of research, so that if a failing project leads the private sector to withdraw, the public sector should also withdraw its subsidies. “Losers” can quickly be dropped when private entrepreneurs closest to the market make decisions, not civil servants who are invariably one step removed from the private sector. In some cases, simply giving tax credits for private sector R&D may yield better results than government-funded and directed R&D programmes.

Risks and rewards from commercial deployment of technologies should be left to markets to determine, and government support for technology R&D should cease at the development stage. For competitive outcomes, government-funded R&D needs to encourage risk-taking and tolerance for failure as a means of discovering valuable information. The mix of taxpayer-funded R&D investments should be skewed towards more “exploratory” projects characterised by greater uncertainty in the distribution of payoffs.

Do R&D subsidies by government support useful research that the private sector would not have undertaken? Or do those subsidies substitute for private sector R&D expenditures? Government- funded R&D programmes are ultimately paid for by taxes on the private sector and it is important that such questions are studied carefully by policymakers.

In his comments on the Government’s role in inculcating entrepreneurship on the eve of Malaya’s independence, Dr Goh Keng Swee, often noted as Singapore’s architect of economic success, wrote this: “No official selection board or public service commission can possibly spot potential captains of industry by whatever techniques of selection it may devise.”

Analogously, one should not depend on government-staffed R&D funding committees to play a lead role in technological and commercial developments in clean and renewable energy technologies. Policymakers would be better off playing a supportive and an enabling role for private sector-driven R&D programmes since the track record of governments successfully choosing winners is not very impressive.

Source : The Kathmandu Post