Research Funding Allocation Policy Recommendations
Summary Statement of the Policy Problem
Research funding allocation is a serious issue in every major country, as research and scientific innovation, if intelligently pursued, can lead to economic prosperity, the safety of a nation’s uncertain future and even scientific breakthroughs that can change the entire landscape of an economy (Bernanke, 2011). In New Zealand, over $1.1 billion is used to fund research and development each year (MBIE, 2018). The decision on which areas of science to spend this budget on should not be taken lightly as there are huge amounts of financial accountability for governments in respect to public spending. The Ministry of Business, Innovation and Employment are faced with the task of deciding how much of their budget to invest in direct impact research with potential for short term commercialisation or on uncertain ‘blue sky’ science with the hopes that a transformational growth will be a future outcome. These decisions must align with MBIE’s goal to “grow New Zealand for all”, and achieve objectives such as securing future labour supply, transitioning to a low emission economy and expanding New Zealand’s economy (MBIE, 2018).
Summary Statement of the Framework Being Used
The main framework to use in assessing the effectiveness of the funding allocation decisions and the policy recommendations is an extended adaptation of a cost benefit analysis. Taking influence from the initial policy framing section of this project, the cost benefit analysis should account for cost effectiveness, equity, relevance, and also stress the importance of the potential social benefits of long-term projects. These guidelines to the cost benefit analysis provide a necessary framework to decide not only if certain funding will be economically viable and responsible, but also if funding a certain researcher will lead to achieving the significant long- and short-term goals of MBIE and in turn serve the needs of New Zealanders.
Expanding beyond this, behavioural economic frameworks should also be used in the funding decision making process. Both while choosing who the funding is allocated to and also in analysing how the research would affect its targeted stakeholder group. Behavioural ideas should be brought up as they can give a fresh line of thought into the potential benefits and costs of a research project and can also change the way researchers use their portion of the budget in terms of efficiency (Madrian, 2014).
Policy Recommendations
The aim of achieving not only the scientific and economic goals of MBIE, but also the target of growing private sector research and increasing the efficiency of the budget spending, have been considered when developing these recommendations. The ideas that will be laid out to accomplish these objectives are to offer both financial and non-financial incentives to researchers, and to change perspective on the concept of ‘picking winners’.
• Financial and non-financial incentives.
Financial incentives with the aim of increasing private sector research and development, is a technique widely used by governments throughout the world, with tax credits and deductions quickly becoming one of the more favourable incentives (EY, 2014). These types of incentives work by offering the tax credits or deductions after a firm has reached a certain threshold in research and development spending.
Non-financial incentives can be far more complicated and require greater creativity in deciding on how to go about implementing them. Non-financial incentives in this type of policy have the goal of increasing the efficiency of researchers. This can be done by introducing ideas such as scientific awards for top performers or by increasing levels of praise and recognition for successful research projects.
• Picking winners
The idea of picking winners comes from modern government’s fear of a certain project failing and receiving public scrutiny. A government will often choose to back industries or projects that are already thriving, thus reflecting positively back on the decision, creating greater immediate benefit and generating minimal public annoyance (Simpson, 2017). When it comes to scientific research and development, this concept is ever relevant as governments are continually hesitant to take risks. Due to the potential costs involved, governments will generally want to intervene to fix market failures, rather than take risks to create new wealth and industries with greater public value (Mazzucato, 2017). To truly discover ‘transformational change’, as MBIE aim to do, more calculated risks must be taken without the fear of public back lash. This would require MBIE to put more consideration into not just picking projects that look likely to win, but “to make strategic choices around societal and technological missions, which can ‘tilt’ the playing field around transformative change across many sectors” (Mazzucato, 2016).
How the Policy Recommendations follow from the Framework
• Financial and non-financial incentives
Naturally a cost benefit analysis will be an effective framework to use in any policy decision, as pros and cons should always be well thought out when making choices, especially ones with such significant importance. In the context of financial and non-financial incentives, a cost benefit analysis is crucial. In the case of tax-based incentives, money is being forgone by giving up taxes which could otherwise be spent on different public goods. When deciding on the financial size of these incentives, the public costs should be carefully weighted, using the outlined framework, against the equity gained from encouraging more research and the value of the potential social benefit gained from the research, whether that be long- or short-term benefits. Applying a cost benefit analysis to the non-financial incentives is still a useful tool, despite these incentives having a far lower cost. It should be well thought out as to whether it is worth offering awards and extra recognition to researchers and if this will truly increase their productivity.
When working with incentives, behavioural economic ideas are logically the basis of how said incentives will be effective. By applying psychological ideas to economic decision making, people’s motivations can be more accurately predicted, therefore providing a more efficient path on how to lay out incentives to researchers. By including a mix of financial and non-financial incentives, the effect of crowding out intrinsic motivation can also be limited (Australian Government Productivity Commission, 2008).
• Picking winners
The concept of picking winners aligns seamlessly within the framework of a cost benefit analysis. However, to stay consistent with the idea of avoiding decision making with the sole purpose to look good in the public eye, the cost benefit analysis must be looked at from a particularly progressive viewpoint. While spending should still be responsible and have a purpose with a clear target, it is important that public pressure to get short term results are not given more importance than the potential future benefits of innovation and transformational change (Mazzucato, 2017).
Behavioural economic concepts are also very applicable to this concept. By considering psychological concepts and being self-aware of irrational behavioural biases, MBIE can make decisions on budget allocation that have limited behavioural effects (Madrian, 2014). This will lead to decisions being made completely to serve the needs of New Zealanders, with less political influence and attempts to use research as a tool to gain public popularity.
Evidence to Support the Recommendations
• Financial and non-financial incentives
In terms of the funding put into research and development, New Zealand has fallen behind many of their fellow OECD counterparts. Using the latest published figures as of 2015, research and development accounts for 1.3% of New Zealand’s GDP expenditure. This is almost half the OECD average of 2.4%. Even New Zealand’s closest colleague Australia, are spending 1.9% of their GDP on research and development (OECD, 2018). Financial incentives are widely used in many other countries and are more are needed in New Zealand if this figure is to increase (EY, 2014).
Non-financial incentives have proven to be very useful, sometimes more-so than economic incentives, in increasing motivation and output. For example, studies have shown that offering students a trophy for meeting certain performance targets has been as successful a motivator as offering $10 and $20 cash. Another study has shown that when employees who were given daily feedback, were also given thankfulness and praise for their efforts, the number of fundraising calls they made increased by 50% (Madrian, 2014). These techniques can certainly be applicable in increasing productivity or researchers, and at what is not a huge cost to the budget.
• Picking winners
When making the choice on how to allocate funds, fixing market failures should not be the only objective. In the past risk taking in innovation has led to public wealth creation which has benefited many countries. The creation of NASA in the 1950s was a result of risk taking and putting trust into creating new industries with huge unrealised benefits. NASA was given free reign to think big and take risks. They also received ample funding to attract top scientific talent and has since lead to many great scientific breakthroughs from space travel to the internet (Mazzucato, 2017). Thinking like this can lead to hugely important innovations and breakthroughs that will benefit New Zealand.
Short-, Medium- and Long-term Consequences of the Recommended Actions
Should the recommendations be taken on board, there are many consequences that not only align with MBIE’s outlined objectives but also effects that can benefit New Zealand in many different ways.
Short term:
• Increased private sector investment in research and development
• Funding allocation is changed to have less emphasis on ‘winners’ and more emphasis on projects that will have greater long-term potential
• Decisions will be made with less irrational bias
Medium term:
• Improved efficiency in funded research projects
• Achieving excellence in the level of science and moving closer to transformational growth
• New Zealand will be nearing the OECD average in terms of the R&D to GDP ratio
Long term:
• Long-term projects begin to realise transformational growth
• New public wealth and industries are created, meaning more opportunity and job security heading into an uncertain future
• Blue-sky research develops branching paths of research to benefit multiple sectors.