Low R&D in the UK: Calling Michael Mandel

Michael Mandel and I agree on at least one thing – R&D is an investment:

The factory is a long-lived investment which provides returns not just this year, but years into the future. That’s why Intel’s investment gets added into GDP, separate from the value of today’s production of microprocessors. Similarly, R&D is a long-lived investment, which pays off for years to come. There’s an asset created, the stock of knowledge, which didn’t exist before.

Michael often writes about the expected future return in terms of the benefits from new knowledge. I would only add that there is also a cost to investing, which is why we should check out the New Economist coverage of a paper by Mark Rogers on why the business R&D to GDP ratio is so low in the UK:

the low BERD to GDP ratio appears to reflect low (perceived) opportunities by firms and the inability of firms to manage R&D to generate value. The paper provides some, tentative evidence, that high rates of competition in the science-based sector are associated with low returns to R&D.

One should note that private returns from R&D are limited to expected future profits – and hence are likely to be lower than the social return from R&D investment.