Why firms (do not)

participate in EU funded
R&D consortia

Prof. Dr. Reinhilde Veugelers

Full Professor at University of Leuven, Senior Fellow at

Bruegel, Research Fellow at CEPR.
This talk

Policy attention for stimulating R&D
cooperation

European Union, Framework Programme (FP)

67% of the FP budget for COOP

Is this attention & money well spent?

In EU FP business participation has been
declining steadily over time.

39% in FP4, 31% in FP6, 25% in FP7
Why firms (not) join (publicly supported) R&D
cooperation?
This talk

A short review of economic & management
theories on private and public benefits and
costs of R&D cooperation

Empirical literature on firm participation in
cooperative R&D and their effects

Empirical literature evaluating the effects of
publicly sponsored R&D cooperation on firm’s
innovative performances.

Evidence on costs and benefits for firms when
participating to EU-FP projects.

Conclusions
Management Literature on
Motives for R&D collaboration

Sharing of costs/risks

Synergies: combining complementary
know-how

(Mutual) access to/monitoring of external
know-how
but requires own in-house R&D to efficiently
absorb

Government support
Problems of R&D collaboration

Information asymmetry:

A priori assessment of partners know-how

Uncertainty of R&D output

Contracts difficult to enforce

Internal adoption of external know-how

‘not invented here’ syndrom

Opportunism: exposing valuable know-how
without return

Keep know-how proprietary
 Some insights from wide
body of IO theory on R&D
cooperation
See reviews (o.a. De Bondt (1997),

I.O. focus on the effects of spillovers on R&D cooperation

Main problem considered: imperfect appropriability of know-how

Main motive for cooperation considered: internalisation of
spillovers

Appropriation conditions can increase the incentive to internalize the positive

externality (d’Aspremont and Jacquemin, 1988; De Bondt, 1997).

Appropriation conditions can increase the incentive to free ride on the
cooperative agreement; Kesteloot and Veugelers, 1995; Greenlee and
Cassiman, 1999): industry wide cooperation
Impact of spillovers on private
and public benefits from R&D
cooperation
(d’Aspremont & Jacquemin (1988), Kamien, Muller & Zang (1992),
De Bondt & Veugelers (1991), Motta (1992)….

Non-Cooperative R&D decreases with spillovers; Cooperative

R&D increases with spillovers

When actual spillovers exceed a critical level:

cooperation leads to higher R&D investments

R&Dcooperation becomes increasingly more profitable as spillovers are
larger

Welfare with industry wide cooperation is higher when spillovers are large.

Lenient policies towards R&D cooperation

Firms would choose a spillover level in the range where

cooperation would result in higher welfare.
Empirical evidence on R&D cooperation

Which firms cooperate?

Firm size, R&D intensity, industry effect and government support

Different types of partners (horizontal, vertical, science)

The effects of cooperation on the participating firms’ innovative

performance are examined in eg Belderbos et al (2004),
distinguishing between the various types of R&D partners

cooperating with competitors and suppliers improves the productivity
performance, and innovative performance, at least of the incremental
type.

Cooperation with universities is instrumental in creating innovations
generating sales of products that are novel to the market
 Empirical evidence on R&D
cooperation: the impact of spillovers

Econometric evidence for Belgium: Cassiman & Veugelers

(2004) American Economic Review

The impact of spillovers on the likelihood of cooperation, taking

into account

the differential impact of in& out-going spillovers

the endogeneity of spillovers

the different types of cooperation partners

absorptive capacity
 The effectiveness of various
mechanisms to appropriate the returns
from innovation (outgoing spillovers)
Mechanisms Total Sample Coop
Firms
Legal mechanisms
Patents 19% 31%
Registration of Designs 8% 12%
Strategic Mechanisms
Secrecy 36% 44%
Complexity of Product Design 36% 47%

Lead Time 56% 61%

Source: Eurostat CIS survey 90-92 for Flanders (N=364)

Results
Conditions favoring R&D cooperation:

high costs induce cooperation: cost-sharing

high risks inhibit cooperation: opportunism more difficult to prevent

lack of know-how inhibits cooperation: no scope for synergies, lack of
absorptive capacity

Impact of spillovers on R&D cooperation

The more effective is legal protection (at the industry level), the more
likely that firms will cooperate (protect against free riding)

Firms who can more effectively “strategically protect their knowledge
are more likely to cooperate (protect against free riding)

the more important the firm considers channels of accessing
external know-how, the more likely they are to cooperate
(internalizing spillovers as motive for cooperation)

A number of follow-up studies for other countries (UK, France, Germany,

Spain), using similar data and models confirm the relevance of spillovers as
an explanatory factor for R&D cooperation (Abramovsky et al. 2010, López
(2008)).
Empirical evidence of public R&D support
programs for R&D cooperation

Sakakibara (1997) analyzes Japanese government sponsored R&D

consortia and finds evidence that the diversity of a consortium is
associated with greater R&D expenditure by participating firms.

Branstetter and Sakakibara (2002) examine the impact of government

sponsored research consortia in Japan. They find evidence that
participants of research consortia tend to increase their patenting after
entering a consortium.

For Flemish and German firms that collaborate with science, Czarnitzki
(2009) finds that those firms receiving a subsidy for that collaboration
have on average higher R&D as compared to firms in non-sponsored
university collaboration;
The 7th FP (2007-2013)

Total amount: EUR 50521 million

Distributed to

Cooperation (FP, JTI) 64%

Ideas (ERC) 15%

People (Marie Curie) 9%

Capacities (Research infrastructures, SMEs, Regions of
Knowledge, Research Potential, Science in society,
International Cooperation) 8%

JRC 3%
13
EU Framework Program R&D
collaboration

Specific features of EU collaborative FP projects

They are organised around thematic areas, with Information and

Communication Technologies (ICT) the most important (28%),
followed by health (17%) and energy, transport & environment.

Supported R&D cooperation is cross-border, between participants
from different Member States (currently from at least 3 different
countries).

They involve increasingly bigger consortia, with the average number
of participants per project 12 in FP6 (up from 6 in FP5).

FP funded projects are typically “pre-competitive” and have a majority
of universities and public research organizations as partners.

EU collaborative projects come with a specific and heavy EU-induced
structure: coordinator, core & peripheral partners, work packages,
milestones, diffusion rules, cost allocation and other accounting rules
….
EU Framework Program R&D
collaboration

The current FP7 program has made efforts to simplify and reduce the
administrative burden, be more oriented towards innovations-
applications, and a better perception of changing business
environment, with more emphasis on public private partnerships
and new instruments, such as the Joint Technology Initiative.

Nevertheless, business participation has been declining steadily over

time.

Why is industry not participating?

not enough benefits? too high costs?

Evidence on effects from participating in
EU Framework Program R&D collaboration

Systematic assessment of the effectiveness of the EU funded

R&D cooperation is lacking.

Only a few econometric studies exist on the effects of EU funded
R&D cooperation.

Evidence from surveys, case studies and interviews with participating
firms.

The available econometric analysis confirms that FP programs

attract the “elite” of larger R&D intensive firms in Europe and that
the main contribution of this programme to the industry
participants is related mainly to the improvement of scientific and
technological capabilities, rather than immediate commercial
value.

Hernan, Marin & Siotis (2003), Benfratello and Sembenelli (2002), Dekker and
Kleinknecht (2008), Barajas & Huergo (2010)
Survey and case study evidence from
participating firms on benefits from EU
R&D cooperation

FP projects tend to be more long term, complex and scientifically/technically risky than
the average R&D activities of the participating firms.

FP projects tend to be more exploratory in technologies which are in the periphery of
participating companies, distant from current core competences. In contrast, self-funded
cooperative R&D projects are used more for exploitation

Two key objectives are listed across all thematic areas and types of partners: keeping
up with state of the art technology and access to complementary skills and resources.

Participation in EU projects also substantially improves the “learning to learn” abilities
of the participants. This facilitates subsequent participation in EU or other sponsored
large networks.

Gaining reputation, networking and signaling are also among the basic motives for
participating in the highly visible, and open information EU public programs.

Large companies do not consider the creation of a commercializable output an
important project objective. Nevertheless the majority of industrial participants report at
least some form of commercializable output in medium-term.

In general firms do no change their protection strategies from ‘normal’ when they are
involved in FP project.

FP projects are characterized by a lower degree of flexibility and higher administrative
burden as compared to privately funded R&D cooperation.

While network experience is a strong stabilizer, it can nevertheless also create negative
path dependencies. Participants can become too “close”.

Source: Polt et al (2008), Llerena & Matt (2005).

(
Case study evidence from participating firms on
benefits from EU R&D cooperation

The origin of the idea for FP projects is overwhelmingly with

universities/PROs.

First-timers report to be relatively more successful in FP
projects.

Direct achievements are the building of networks and
knowledge and acquiring funding.

Commercialization effects are important, but mostly indirect.

Projects that are commercially driven, risky, complex and in a
new area tend to be more successful in terms of innovation.

Enabling factors for project success: strong customer
involvement, complementarity among partners, partners
trust, core partners driving results; project management,
from the outset clarity on roles, IPR protection and
exploitation rules.

Inhibiting factors for project success: lack of market
focus/understanding, weak firm commitment, weak inter-firm
integration of projects.
Views from large corporate
participants

Large European firms participate in EU FP projects because of

The money – leverage own R&D efforts with external resources

Networking benefits – finding partners, open innovation

New instruments setting – public-private partnerships

Architecture setting

The criticism on FP raised :

High costs of participating (ex ante responding to calls, negotiating contracts,
financial controls and audits)

Complex rules to participate

Excessive number of instruments

Heavy EU bureaucracy

An imbalance between academic and industrial evaluators

New accounting provisions in FP7, requiring duplicate accounting and
controlling systems.

Excessive red tape in Joint Technology Initiatives (JTIs) (as they are set up as
Joint Undertakings for which EU Financial and Staff Regulations apply)
Some quotes

“It’s beneficial as long as the goals of

research overlap with the company’s
strategic goals”.

“Having a large consortium of players
and the Commission as partner creates
the critical mass to establish Europe-wide
standards”.

“you have to be concerned about IP”
Some conclusions on FP
participation

Benefits go beyond the mere sharing of costs and
relate mostly to the exploration of new ideas and
learning from “elite” partners’ know-how, indirect
commercialisation effects from intra-firm cross-project
spillovers, reputation effects and building network
experience.

These benefits can however not be taken for granted.

They require top management commitment, intensive
involvement and a participation strategy that is fully
integrated in the company’s innovation portfolio
strategy.
Some conclusions on FP
participation

Despite the favorable evidence on benefits from
participation (upon selection), a point of concern is the
low and decreasing participation of EU industry in FP
programs.

But before redesigning its programs in preparation for

the next FP, the EU should invest more in research
that evaluates with solid methodologies and datasets,
using the insights from theoretical models, the
effectiveness of FP programs, and this not only from
the perspective of the private firms’ participating, but
also from a social welfare perspective.