The returns on government support for R&D range from 473% to over 1000%

The Office of the Chief Scientist of the Ministry of Science and Technology is publishing, ahead of the second annual Ra'anana Conference on the National Hi-Tech Policy, a study on the effect of government support in R&D on the economy in order to examine and evaluate the state's investments in support of R&D

The Office of the Chief Scientist of the Ministry of Science and Technology is publishing a study on the effect of government support for R&D on the economy in preparation for the second annual Ra'anana conference for the national high-tech policy, which takes place tomorrow.

Dr. Eli Ofer, Chief Scientist of the Ministry of Science and Technology, and Mr. Haim Fernandes, Deputy Head of the Budget Division at the Ministry of Finance, decided to conduct a joint study to examine the effect of government support for industrial R&D on the Israeli economy in order to examine and evaluate the state's investments in R&D support so far, and all this With the aim of improving and optimizing government allocation and examining the outputs of the government support system.

The research was carried out by the Applied Economics company led by Dr. Shlomi Frizt and in collaboration with Prof. Shaul Lach from the Department of Economics at the Hebrew University and the Business and Industry Division of the Central Bureau of Statistics. The research process was accompanied by a public steering committee headed by Dr. Shuki Glitman, the former chief scientist.

The committee included the Treasury representatives Mr. Yaakov Barkai and Mr. Hagai Ido, the Deputy Chief Scientist at the Ministry of Taxation Lydia Lazens, the representatives of the Bank of Israel Research Department Dr. Michel Stravchinsky and Mr. Shai Tzur, Simcha Bar-Eliezer Director of the Business and Industry Division at the Central Bureau For statistics, Robbie Ginel, head of the economics department at the Association of Manufacturers and representatives of Yair Amitai, Chaya Miller and Gadi Levin.

The research shows that:

• The rates of return on government support for R&D are very high and range from 473% to over 1000%.
• The government support creates new research and development activity in the economy on a significant scale which would not have been carried out without it.
• The support mechanisms implemented today create a significant and distinct additionality for R&D in the economy regardless of the industry or the size of the supported firm.
• The study applies an innovative methodology for the additionality analysis to measure the addition of the new R&D created with the encouragement of the government. This finding also indicates an effective management of public funds that leads to the growth of the economy in the State of Israel.
• A significant knowledge spillover was found between firms in the Israeli industry. This finding is another justification for government involvement to encourage R&D investments by industrial firms beyond the level at which they would operate without government support.

Findings

A. The government support creates new R&D that would not have been carried out in the economy without the government support - in a total amount ranging from 2 to 3 times the amount of the government grant (depending on the amount of the grant). This result is stable and clear across different branches both in industry and in the software and R&D branches and for firms of different technological levels and of different sizes. The support mechanisms implemented today therefore do not push private money (that is, they do not finance investments that would have been made in any case) but create a significant and distinct additionality for R&D in the economy regardless of the industry or the size of the supported firm.

Example: the addition of R&D in the software and R&D industries as a function of the amount of the government grant. In orange - 45 degree line:

The estimate of the new R&D volumes created as a result of the government grants is a lower barrier to additionality in practice. This is because the grant data does not include royalties from industry, which are a key component of the chief scientist's budget. The inclusion of royalties would have significantly increased the additionality estimates since the firm's decision variable is the net grant (minus royalties).

The analysis methodology for estimating additionality is Propensity Scoring based on the matching of pairs of firms that have a similar chance of receiving government support but one of them received aid and the other did not. The above results are based on 700-900 observations (the R&D surveys in industry and the R&D surveys in the software and R&D sectors). The matching is based on a model for estimating the chance of receiving government support as a function of the firm's characteristics on a matching algorithm between firms that received and did not receive funding (at the same level

technologically and in the same size group). The adjustment results are good (absolute value of the difference in the chance of receiving financing) and the coefficient estimates were found to be stable in different specifications.

B. The return on government support in R&D is very high - even in industries where there are many observations and many investments in R&D (elite/elite mixed).

The results obtained reflect a minimum multiplier of 5 to 6 times between the government investment and the total future addition to the industrial product (for a grant of 5 million NIS for a firm with a turnover of 50-300 million).
The results obtained reflect a minimum multiplier of 1.5 to 2 times between the government investment and the total future addition to the industrial product (for a grant of 5 million NIS for a firm with a sales turnover of 300+ million).

The return to the economy from government support was estimated in two separate models of production functions (Griliches, Blundell & Bond). Both are accepted models in the professional literature. The results obtained, both for the return on R&D and for the spillover, are in line with what is known from parallel studies in the world.

Conclusions

• The existence of a significant spillover between firms justifies government intervention in encouraging R&D investments by firms in the industry beyond the level at which they would operate without government support.
• The high additionality that was found indicates the formation of a new R&D which would not otherwise have happened on a high scale and this is as a result of the activity of the government support mechanism.

Dr. Eli Ofer points out that these findings are not in line with the policy of cuts dictated by the Ministry of Finance in recent years on the R&D budgets and is an injury to one of the main engines of growth in the State of Israel. This study indicates the effectiveness of the chief scientist's support mechanisms and it is not surprising that the countries of the world are copying this successful model.

Dr. Shuki Glaitman, who headed the public steering committee, says that the results of the study reflect what we know from testimonies and findings in other economies. However, it is surprising and gratifying to see the strength of the government's positive influence on the economy in this context and the significance and stability of the results.

The research made use of the industry surveys (years 1995-2003, about 2,300 establishments and 11,900 observations) in combination with the data of the R&D surveys in the industry (years 1996-2004). At the same time, the data from the R&D surveys in the software and R&D industries were analyzed (about 1,600 observations for the years 1997-2005)