Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time, macroeconomist and expert strategist Charles Kalshoven on whether the Dutch government is investing enough in innovation. “You shouldn’t slaughter the goose that lays the golden eggs. On the contrary: you should feed it.”
The elimination of the National Growth Fund will lead to a decline in Dutch spending on research and development and thus pose a risk to the Netherlands’ future earning potential. With this warning, research institute TNO Vector recently sounded the alarm. After all, that kind of government spending stimulates new businesses, allows existing businesses to grow, and contributes to the creation of prosperity and well-being, TNO Vector argues. But is it really up to the government to invest in innovation? And if so, is the Netherlands investing enough?
Dirty work
Yes, says Kalshoven, it is the government’s job to invest in innovation to some extent. Investments that are often seen as too risky by companies could provide big social benefits, after all.
“Companies make investments only if the private benefits - the profits in euros - exceed the costs. This is all the more true when those profits are more uncertain, as in the case of innovations. As a result, some investments in innovation will fall by the wayside, even though the social return on them is very high. Think of employment or solutions to personnel shortages, but also of life-extending innovation, dirty work made cleaner and innovation that makes the economy more sustainable. These kinds of benefits are not necessarily reflected in a company’s profit and loss account, but for society as a whole they exceed the costs. That justifies public spending on research and development.”
Lisbon
When asked whether the Dutch government should invest more in innovation, Kalshoven also answered in the affirmative. “In the Lisbon Treaty, the EU agreed to stimulate economic growth and employment so that the European economy would become the most competitive in the world. One of the goals in the treaty was for each member state to invest 3 percent of gross domestic product in research and development. At 2.3 percent, the Netherlands was well below that in 2022. To meet the EU’s ambition, the Netherlands would have to increase spending on research and development. Not just because this is what we agreed to do, but also because we can reap the benefits.”
That our investments in research and development are on the meager side can also be seen when you compare the Netherlands to Belgium and Germany.
Dutch universities
“When it comes to fundamental research (developed knowledge that does not require immediate concrete application, ed.), the Netherlands is actually doing quite well. Such research mainly takes place at universities, and of the top 100 universities, seven are Dutch. Germany has three, Belgium one. But when it comes to spending on R&D, our neighbors are doing better (Belgium sits at 3.5 percent of GDP, Germany at 3.1 percent, ed.) and their labor productivity has also risen faster over the past 15 years. Incidentally, the euro you spend on R&D is not already reflected in higher labor productivity next year. That is more of a long-term thing.”
The fact that labor productivity has risen faster in Germany than in the Netherlands has to do with the fact that our eastern neighbors have a large manufacturing industry, Kalshoven suspects. “If you have more manufacturing industry, there are more opportunities to apply the developed knowledge immediately. Germany has a lot of industry, so there are many companies that can also do something with that knowledge immediately. It is therefore important for a country to invest primarily in research and development that ties in with the existing economic structure. It must build on that and ensure that new companies can join such an ecosystem. New companies can grow rapidly and provide healthy momentum, but can have difficulty germinating in a vacuum. For example, it helps to be able to tap into already existing knowledge or suppliers. Old and new can reinforce each other. So governments do well to connect to what is already there. And they must find a good balance in this: keep an ear to the ground with existing companies, but not get discouraged. The latter runs the risk of protecting only old industries, as the Netherlands did in the past with shipbuilding.”
Tempting
As a government, you have to accept that not every investment in innovation turns out well, Kalshoven opines. He doesn’t think it is a good idea to keep lamenting about the National Growth Fund, like the scrapped excise tax increase on fuels paid from it. “The government doesn’t know everything either, and it’s inevitable that in innovation you will lose money from time to time. That may well clash with the Dutch settlement culture. And when government budgets are tight, it is tempting to take money out of a fund intended for long-term investment. You usually only see the results of innovation spending after years - after the next election. So the pitfall is precisely that you don't put enough into innovation now as a government. Also because innovation is badly needed to cope with important social challenges: think of shortages on the labor market, costs due to aging and problems with migration and housing shortages.”
So we should keep the National Growth Fund? Kalshoven: “Absolutely. Every euro the government spends on innovation attracts spending from companies that can do something with that innovation. You shouldn't kill the goose that lays the golden eggs; you should feed it.”