Risk-taking, R&D and the recession

Contributing to the spiked/CMP debate on the future of business, an innovation expert demands real wealth creation.

In his contribution to the spiked/Clarke Mulder Purdie debate on the future of risk-taking and innovation after the recession, James Woudhuysen argues that the woeful level of Western investment in R&D reveals much about the capitalists’ state of mind.

One of the poignant things about thought today is how it is dominated by vulgar economic explanations of the crisis. This applies to the world of innovation as much as to that of MPs’ behaviour. The latest, fairly sophisticated but overly economic analysis of innovation comes from the Paris-based research body, the Organisation for Economic Co-operation and Development (OECD).

In a new 37-page report, the OECD is adamant that the crisis has led to a decline in innovation:

‘Corporate reports for the fourth quarter of 2008 in many cases already show a decline or slower growth in research and development (R&D) spending. Forecasts for 2009 confirm the trend…

‘R&D is declining because it is mainly financed from cash flow (retained earnings), which contracts in downturns. At the same time, as banks, markets and investors have become more risk averse, firms face difficulties in tapping into external sources of funding to support their investments in R&D. Business R&D is also being re-oriented towards short-term, low-risk innovations, while longer-term, high-risk innovation projects are being cut first.’ (1)

So far, so predictable. But it seems to escape the OECD that the decline of innovation is a cause, not just a result of the crisis. The report recognises that public R&D in energy has long been in decline, but fails to use figures which the OECD itself produces – figures that show, in the US and Europe and as a percentage of GDP, the stagnation of business R&D, and the rapid decline of all aspects of public R&D (2).

Yes, as the OECD says, venture capital investments are in steep decline (including in China, though it looks like Initial Public Offerings there will revive within a year). Yes, barriers to entry for small, innovative firms are higher, and the decline in world trade makes global value chains in innovation tougher to operate. But the dangers of a purely economic account of barriers to innovation today come out in the OECD’s remarks on energy. It argues that lower oil prices have already reduced incentives to switch to alternative energy sources – and that the declining prices of raw materials reduce pressures to use these resources more efficiently. Yet already oil prices have risen to $70 a barrel; and falling prices for steel and cement, for example, count in favour of wind turbines and hydroelectric dams. Perhaps that is one of the reasons why China hopes to generate 20 per cent of its energy from renewable sources by 2020 (3).

Rightly, the OECD touches on ‘focusing public support on promising research and innovation affected by the crisis, for example long-term and risky research’, and on using public procurement to support R&D. But it is much more interested in local or regional clusters of innovation – a weak doctrine first pioneered by Harvard’s Michael Porter nearly 20 years ago (see his book The Competitive Advantage of Nations, 1990).

The OECD’s refusal to think big is continually reflected in its talking up of SMEs (small and medium enterprises) – mentioned no fewer than 52 times. In the same, unambitious and economics-obsessed mode, it believes that carbon capture and storage ‘will not be aggressively deployed in the coming decades without a clear carbon price’. Well, yes – if you think that there’s anything clear about carbon prices today and the EU’s byzantine Emissions Trading System, and if you believe that prices and markets are the alpha and omega of innovation.

In contributions to this debate on spiked, Rob Killick has rightly made the point that the roots of the West’s problems with innovation lie not in economics, but in its cultural antipathy toward moving ahead (4). In this sense, ethical investor Edward Mason is wrong to argue in his contribution to the spiked/CMP debate that ‘Developed societies want wealth creation, but it’s ever-more important to them how it is created and who shares in it’ (5). Cultural elites in the West are not interested in wealth creation the way they once were: why else have they bothered with financial services so much these past years?

On the contrary, wealth creation itself is stigmatised as damaging the planet, as useless in terms of creating happiness, and so on. In this sense, then, David Kern of the British Chambers of Commerce is right to say in his contribution to this debate that the undesirable features of the banking crisis have prompted ‘a general intellectual attack on the whole wealth-creating aspects of capitalism’ (6) – even if the antecedents of today’s attack go way back.

The OECD, however, doesn’t even take its own economic determinism seriously. In the second, empirical half of its report, it usefully tabulates the anti-crisis measures of some of the world’s leading economies. What comes out of its research is that, with few exceptions, Western governments are spending bugger all (forgive the term, but it really applies) on helping societies innovate their way out of the recession. And, characteristically, the OECD refuses to criticise the lethargy that its findings reveal.

To their credit:

• Finland has announced that it will maintain its target of extending R&D spending to up to four per cent of GDP;
• Korea has set aside no less than 5.14 per cent of GDP on energy conservation, recycling and clean energy supply (even if supply is much more important than conservation);
• President Obama has allocated a reasonable – though by no means forthright – $11billion to fund a smart electricity grid, $7.2billion on broadband to unserved areas of the US, and $17.4billion on fuel-efficient cars (France: €6billion on such cars).

But what are today’s typical government initiatives on innovation? Expenditures, of course, don’t tell the whole story; but their shockingly small scale does tend to give the game away. France is to spend a piddling total of €70million on both nanotechnology and ICT for higher education. Britain is to devote a derisory £50million to support innovation in manufacturing, and aims to get universal broadband out by 2012… at two megabits per second (Australia: 100 megabits per second). The EU will spend a princely €1billion on universal broadband, with no targets for bit speeds. Mighty Germany is to spend just €1.5billion on both clean cars, and incentives to buy new cars.

A lot of these sums wouldn’t even reach The Sunday Times list of UK squillionnaires.

Table 4 of the OECD report also shows what’s going on. Apart from that on bailing out the malignant financial services sector, the emphasis among Western governments is on infrastructure, education and greenness more than it is on science, R&D and innovation. But across all four categories, the sums involved are a joke:

Financial weights of selected, long-term policies in OECD country stimulus packages, May 2009

(percentages based on GDP in 2008) (7)

Even with these figures, there is a fair amount of double-counting across the four categories.

Across the OECD, the average size of fiscal packages to beat the recession amounts to more than three per cent of GDP – and in the US, to more than five per cent. So one does not need to be an old-fashioned state interventionist to see that, in terms of priorities, Western governments are not serious about using innovation to exit today’s crisis. Nor, however, should one be a Marxisant economic determinist in trying to understand these shocking figures. Economics alone, as Marx would be the first to say, do not explain the sheer scale of risk-aversion today. Thus the OECD writes blithely of the need to adapt policy instruments to ‘the central importance of non-technological innovation’ (sic).

For the most part, members of the Western elite have given up on thinking big, given up on R&D, given up on the future. They are mice, not men.

(1) Policy Responses to the Economic Crisis : Investing in Innovation for Long Term Growth, OECD, 10 June 2009, p6

(2) An R&D recession, by James Woudhuysen, 27 May 2009

(3) China plans increase in renewables targets, BusinessGreen, 10 June 2009

(4) This is really a political crisis, by Rob Killick

(5) A new era of regulation? by Edward Mason

(6) The demonisation of entrepreneurship, by David Kern

(7) OECD, op cit, p25