Publicly funded applied research pays off: The effects of the Fraunhofer-Gesellschaft on firm performance

Diego Comin, Georg Licht, Maikel Pellens, Torben Schubert 08 March 2018

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Scientists and policymakers agree that innovation is the most important driver of sustainable growth, welfare creation, and high employment rates. In the Lisbon Strategy, the European Commission announced its main goal of turning the EU into the most competitive knowledge-based economy in the world. In order to achieve this goal, the Commission makes significant investments in R&D and innovation through its Framework Programmes.

But is this enough? The EU is lagging behind the US not only in productivity and R&D spending, but also in its ability to transform the latter into the former (Ortega-Argilés et al. 2014), an issue which is particularly pronounced in many south-eastern European countries. Furthermore, this gap seems to have widened further both during and after the crisis (Castellani et al. 2016).

The EU’s more limited ability to profit from R&D has led several authors to propose that innovation policies should not only focus on increasing R&D investment, but should also become more learning oriented. That is to say, policies should improve firms' ability to turn R&D into growth and productivity gains (Castellani et al. 2016). This approach can already be observed in the encouragement of collaborations between firms and public research organisations through formal requirements in EU-funded projects.

The vast majority of studies analysing the effects of private-public research collaborations have focused on universities as the primary providers of basic scientific knowledge (compare Robin and Schubert 2013). While in most countries, universities are indeed the dominant actors in the public research landscape, a number of countries possess quite sizeable public research organisations which explicitly focus on helping private firms to derive industrial applications and innovation from scientific knowledge – examples include TNO in the Netherlands, the RISE institutes in Sweden, VTT in Finland, and the Fraunhofer-Gesellschaft in Germany. The fact that these countries arguably also rank among the innovation leaders in Europe begs the question of the extent to which their success is to the result of investment in public applied research. To date, however, the effects of collaborating with applied public research organisations on the firms involved have not been sufficiently studied.

The FRAME project

In a study which forms part of the project Horizon 2020 project FRAME funded by the European Commission, we provide the first empirical evidence on how the Fraunhofer-Gesellschaft, the world's largest applied research organisation, affects the performance of collaborating firms (Comin et al. 2018). Founded in 1949, Fraunhofer today employs approximately 24,500 employees who conduct applied research in all fields of science, producing around 500 patents per year (Comin et al. 2015). Fraunhofer scientists also participate in research contracts in which they solve specific technological problems facing individual firms. Fraunhofer's revenue stemming from projects for and with private firms exceeds €600 million per annum and thus represents a third of its total budget of €2 billion.

To test the effect of these projects on firm performance, we combined a confidential dataset of Fraunhofer research contracts signed with German firms between 1997 and 2014 with information from the German contribution to the Community Innovation Survey, which contains information on the performance and innovation activities of a large panel of companies. In order to establish whether collaborating with Fraunhofer actually improves performance, we had to eliminate problems associated with selection bias (i.e. the possibility that better performing firms are more likely to enter into a research contract with Fraunhofer than worse performing ones). To that end, we made use of recently developed heteroscedasticity-based IV estimators (Lewbel 2012). Using these IV methods, we analyse how collaborating with Fraunhofer affects various dimensions of firm performance.

Core results

Our key empirical findings suggest that Fraunhofer contracts have a strong effect on firm performance – a 1% increase in Fraunhofer expenditure made by a firm generates an increase in turnover growth of 1.4 percentage points and a 0.7 percentage point rise in productivity growth. These increases amount to 21% and 11% of average turnover and productivity growth, respectively.

We also find that these effects are at least partially driven by a shift in the firm’s innovation strategy, which suggests that Fraunhofer is generally successful in its mission to disseminate and apply scientific knowledge. An initial piece of evidence for this is that interacting with Fraunhofer changes firms’ hiring behaviour, with a 1% increase in Fraunhofer expenditure leading to a 0.2 percentage point increase in the share of employees with a tertiary education background. Second, Fraunhofer expenditure also leads to a more successful innovation strategy, with a 1% increase in Fraunhofer expenditure translating to a 0.7 percentage point increase in the share of sales drawn from new products and services.

Based on certain assumptions, we can use the firm-level results to infer the macroeconomic effects of these projects in Germany. Our results indicate that Fraunhofer induces a total increase in value added of €2.2 billion.1 Since Fraunhofer’s total annual budget is about €2.1 billion, the overall benefits in terms of increased value added exceed the total ‘costs’ of Fraunhofer. Compared to total expenditure of €682 million incurred by German industry, the benefits appear even more pronounced.

Policy implications

Public R&D policy largely focuses on R&D tax credits to private R&D and for financing of basic research typically conducted in universities. Our research illustrates that a fruitful strategy to foster innovation capacity and productivity growth is to strengthen organisations that transfer technological knowledge to companies.

Applied research organisations such as Fraunhofer-Gesellschaft2 are capable of bridging the gap between basic scientific knowledge (falling into the domain of universities) and the development of new commercial applications (falling into the domain of firms). By bridging this gap, companies can have access to state-of-the-art technological knowledge that enables a knowledge-intensive/innovation strategy which leads to faster sales and productivity growth, as well as to more jobs for skilled workers. The establishment of, and investment in, applied research organisations could therefore form a central pillar of national and European innovation policy.

Editors’ note:  This research is part of the FRAME project. This project has received funding from the European Union's Horizon 2020 research and innovation programme under grant agreement No #727073

References

Castellani, D, M Piva, T Schubert  and M Vivarelli (2016), “R&D and Productivity in the US and the EU: Sectoral Specificities and Differences in the Crisis”, Papers in Innovation Studies No. 2016/15, Lund University, CIRCLE-Center for Innovation, Research and Competences in the Learning Economy.

Comin, D (2014), Malaysia Beyond 2020, UTM Press.

Comin, D, G Trumbull and K Yang (2015), “Fraunhofer: Innovation in Germany”, in Drivers of Competitiveness, World Scientific Publishing: 409-444.

Comin, D, G Licht, M Pellens and T Schubert (2018), "Do Companies Benefit from Public Research Organizations? The Impact of the Fraunhofer Society in Germany", Papers in Innovation Studies No. 2018/7, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy.

Frietsch, R, C Rammer and T Schubert (2015), “Heterogeneity of Innovation Systems in Europe and Horizon 2020”, Intereconomics 50(1): 9-13.

Lewbel, A (2012), “Using heteroscedasticity to identify and estimate mismeasured and endogenous regressor models”, Journal of Business & Economic Statistics 30(1): 67-80.

Ortega-Argilés, R, M Piva and M Vivarelli (2014), “The transatlantic productivity gap: Is R&D the main culprit?”, Canadian Journal of Economics 47(4): 1342-1371.

Robin, S and T Schubert (2013), “Cooperation with public research institutions and success in innovation: Evidence from France and Germany”, Research Policy 42(1): 149-166.

Endnotes

[1] Further regression in levels show that the multiplier of Fraunhofer expenditures with respect to turnover is 13.18. Total project revenue with private firms in 2016 was €0.68 billion, leading to an increase in turnover of €8.99 billion. In Germany, the ratio of value added to turnover is stable and approximately 24% corresponding to an estimated increase in value added of €2.2 billion.

[2] See Comin (2014) for another example of such an organisation and a discussion on why the market does not provide these kind of services.

 

This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 727073

 

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Topics:  Frontiers of economic research Productivity and Innovation

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Professor of Economics, Dartmouth, and CEPR

Head of the Research Department of Economics of Innovation and Industrial Dynamics, Centre for European Economic Research (ZEW)

Senior Researcher, ZEW

Associate Professor, CIRCLE, Lund University; Senior Researcher, Fraunhofer ISI

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