Public Research and Development (R&D) spending can add a significant boost to private sector productivity.

Frontier’s study, commissioned by the Department for Science, Innovation and Technology (DSIT), provides new evidence that public investment in R&D generates significant, positive returns for the UK economy through its impact on private sector productivity. This highlights the important role of public R&D to support the government’s mission around boosting UK growth.

Appraisal of public R&D investments require robust evidence on the expected rate of return. The study updates previous evidence on the rate of return, using more recent data (including from the period of slower productivity growth post-crisis) and more granular industry-level data to provide vital new insights. The study also qualitatively examines the mechanisms through which R&D investment can generate returns through case studies of two investments.

The results suggest a rate of return of around 40% when a six-year lag between public R&D investment and the impact on productivity is modelled. In other words, £100m of public R&D investment could be expected to yield, on average in 6 years’ time, an increase in annual private sector productivity worth £40m – and returns may be even greater over a longer period. The report also explores the wider societal benefits of public R&D that are not directly captured by private sector productivity measures. These include environmental and health impacts, among other positive outcomes.

The quantified rates of return should be interpreted cautiously: rates of return are challenging to estimate robustly, and the study suggests factors that could lead to an upward bias in the estimates. The estimated returns provide only an average across the current level of public R&D, rather than being predictive about the returns to specific public R&D investments. The estimates should therefore be used as context for government appraisals rather than replacing individual project evaluations.

The study was peer reviewed by Gavin Wallis, Head of the Monetary Policy Outlook Division at the Bank of England.

Click here to read the full report: Returns to Public R&D