Why is business spending on R&D so weak?

One theme of Brown's Chancellorship has been the stress he's placed upon the need to increase spending on research and development. For example, in this speech he said he wanted the UK to become "the best place in the world for scientific enquiry and for R&D... we can achieve world leadership in science and innovation."
Today's figures (pdf) suggest this ambition is not being fulfilled. They show that domestic business spending on R&D rose just 4.3% between 1997 and 2005 in real terms.  During this time, real  profits rose 9.3% and real GDP 24.8%.
This weak growth certainly isn't for want of encouragement; in 2005-06, R&D tax credits cost the Exchequer £440m. So, what are the reasons for it? Here are a few:
1. Businesses need to spend less on R&D because others are doing it. Spending by research councils rose sharply, as did spending by foreign companies - some of which would have been a result of takeovers of UK firms.
2. Maybe firms have little confidence in future growth, or maybe they just haven't got many good ideas. It's easy for us in the west to take innovation and growth for granted, and to forget that, in the context of all human history, they are very rare.
3. Maybe firms have learned the lesson of this paper, that the rewards of innovation are teeny; it's great for society, but not for profits.
4. Perhaps Brown's successful pursuit of macroeconomic stability  has hurt innovation. In this classic paper (pdf) Andrei Schleifer showed how economic stability can kill off innovation. This is because firms need booming aggregate demand to make enough profits from a short-lived patent, so if they don't expect a boom, they won't innovate. "If large booms are necessary to cover fixed costs of innovation, stabilization policy can stop all technological progress" he wrote.
I dunno which, if any, of these explanations are right. It could be that the most interesting explanations are the least valid.

Comments

[luis_enrique]

is there anything going on with the sectoral composition of the UK economy (less engineering/manufacturing, more services) and how R&D is accounted for?

When a bank develops a new financial product, or a television producer develops a new show, does that get accounted for as R&D?

[dearieme]

"the need to increase spending on research and development" - whereas the rational man would surely prefer more output, not more input.

[Mark Wadsworth]

Luis, good question, the answer is "no". Frankly who cares about the % level? It is all made up figures depending on very vague definitions.

As ever, Dearieme has beaten me to the hilarious one-liner.

[Laurent GUERBY]

Twenty years (patent duration) is short lived? Most economists have no sense of reality when it comes to intellectual property...

Hopefully they're the lefty Hayek:

"""
Just to illustrate how great out ignorance of the optimum forms of delimitation of various rights remains - despite our confidence in the indispensability of the general institution of several property - a few remarks about one particuilar form of property may be made. [...]

The difference between these and other kinds of property rights is this: while ownership of material goods guides the user of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process. I doubt whether there exists a single great work of literature which we would not possess had the author been unable to obtain an exclusive copyright for it; it seems to me that the case for copyright must rest almost entirely on the circumstance that such exceedingly useful works as encyclopaedias, dictionaries, textbooks and other works of reference could not be produced if, once they existed, they could freely be reproduced.

Similarly, recurrent re-examinations of the problem have not demonstrated that the obtainability of patents of invention actually enhances the flow of new technical knowledge rather than leading to wasteful concentration of research on problems whose solution in the near future can be foreseen and where, in consequence of the law, anyone who hits upon a solution a moment before the next gains the right to its exclusive use for a prolonged period.

The Fatal Conceit: The Errors of Socialism, 1988 (p. 35) Friedrich von Hayek
"""

[jf]

Institutional Inertia. Inertia is defined as "the resistance to a change in motion." Kevin Phillips would probably say that big enterprises become entrenched in their own well-worn materials and methods, meanwhile taking their markets for granted. U.S. auto firms are a good example.

The American TV program "60-minutes" did a piece with Brian Schweitzer, governor of Montana, on a proposed innovative coal to liquid fuel project. Responding to the question "why aren't companies getting into this?", he replied, "every company wants to build the second plant." Companies are risk-averse, and the first project makes most of the mistakes and learns the tough and expensive lessons. So, even if somebody else does the R&D (S&M reason #1), taking the leap to production is too risky, for some.

As long as the focus is on quarterly earnings reports, others with a longer view will win the patents and, one day, be able to sell their ideas to somebody with enough money to put them on the ground.

[Grants]

Contrary to what is invariably the belief – the Government grants are not open throughout the year – the potential Government Grant is not available through the year and neither could it be applied for as per personal needs. In contrast the Government Grant can be applied for only in circumstances where the Federal or the Government Agencies announce and invite applications for the Government Grants. The source is the Federal Register which is published every weekend.