R&D spending in New Zealand is a mixture of private and public investment undertaken to improve productive activity and efficiency. Investment is split fairly equally between private business, government organisations and the universities. It is a long term investment with some uncertainty about outcomes being achieved. It is predominantly a public good investment as most government organisations and universities are providers of R&D but not users of it and hence there is a discontinuity in the connection between investment and results. Furthurmore, the supply of R&D has properties of a free good which lead to users looking for new applications on a wider and wider front (spillovers). For these reasons R&D is generally regarded as a `good thing’ rather than a solid investment vehicle. Cost-benefit studies have shown, both in New Zealand and overseas, some projects with rates of return well in excess of the opportunity cost of capital, yet at the aggregate level there is a paucity of cost-benefit studies confirming such rates of return on a broader industry basis. This paper discusses some results from aggregate studies of the economic impact of R&D investment in NZ and suggests reasons why the links between aggregate supply of R&D and user demand are very weak.


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