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Modelling Return on Investment (ROI) at the firm-level

Innovation Caucus Internship – Chris Dimos, University of Bath

Governments around the world seek to incentivise Research and Development (R&D) of the private sector as a means of boosting innovation, fostering productivity and promoting national competitiveness. In the United Kingdom, the Industrial Strategy aims to establish the UK as the world’s most innovative economy and increase investment in R&D to 2.4 per cent of GDP by 2027. To achieve this ambitious goal, a series of incentives are necessary to encourage more investment in private sector R&D.

A reason why companies underinvest in R&D is that they often cannot fully appropriate the benefits of the outcomes of their R&D activities. Competitors can often copy the new products or processes developed by a certain company’s R&D. This means that R&D, apart from benefits to the R&D conducting company – i.e. private returns, can also give rise to wider benefits accruing to the wider industry, economy and society – i.e. social returns. The greater the “gap” between social and private returns, the greater the unwillingness of a company to invest in R&D.

In order to shed more light into private and social returns of R&D and its implications for policy, Innovate UK and the Knowledge Transfer Network (KTN) have launched a project that aims to measure and model R&D returns. I am currently working with both organisations to meet the project’s objectives. More specifically, the project aspires to develop a Return on Investment (ROI) tool for measuring the impact of publicly funded R&D on the UK economy by taking into account: (i) private and social returns of R&D at the firm-level; (ii) the effectiveness of public funding in inducing additional private R&D spending; and (iii) R&D investment in the long-term by modelling depreciation of R&D and discounting. The impact on the UK economy is measured in terms of Gross Value Added (GVA), employment and income.

The aim of this tool is to better inform innovation policy. Innovate UK can use it to better channel public funding towards those types of companies able to yield large R&D returns (private and/or social). Its network partner, the Knowledge Transfer Network (KTN), can also use the tool to better foster business collaboration to grow the UK economy. The tool will also be helpful to companies allowing them to evaluate the returns they might receive on their contribution to the funded project. Companies have many competing opportunities to direct their internal resources and it is not always easy to decide which is the most rewarding.

Innovate UK and the KTN strive to help companies grow by funding R&D, linking new ideas and opportunities with expertise, markets and finance through their network of businesses, universities, funders and investors. The project, aligned to the mission of both organisations, will enable Innovate UK to maximise private and social returns of publicly funded R&D and the KTN to foster collaborations and make companies grow towards a more innovative and stronger UK economy.