The paradox of public R&D subsidising

Public R&D subsidies are generally considered as blessings for innovative industries. Especially for young dynamic start-up companies and growing Small and Middle size Enterprises (SME's) they are supposed to help bridge the gap between idea and product. Every nation and region is helping its start-up companies in one or the other way and that is fine.

But there is a paradox in the R&D policies as they are implemented today. They tend to have a negative side effect.

A typical start-up SME needs perform 3 to 5 years development work with a small team to come to a product prototype. Then it needs 3 to 5 years work in an extended team or network to come to full production. Only then, the product revenues start coming in, fulfilling the dream of the entrepreneur. Essential for a start-up SME is therefore the focused effort to reach this goal. Where does the money come from to make this come true? This money is supposed to come from venture capital or from a business angel who believes in the idea. A sound business plan is supposed to exist.

The public R&D money is only supporting this process. Public decision makers usually need to satisfy as many people as possible and tend to cut their budgets in small pieces. Therefore public tenders usually cover only tiny portions of the complete product development cycle.

When money gets scarce (we don't even need a blessful time like ours), the private investors and entrepreneurs will encourage / force the start-up SME employees to submit many tenders in reponse to the public programme calls. But because the budgets are small, the SME's need to differentiate the subjects of the tenders and participate in many programmes. This is often contrary to their initial core mission. They lose focus and may never come to a product in the end. After each project, they have to come up with a completely different project to qualify for a new subsidy programme.

But also at the public side, there is a problem. First, evidently, the R&D money needs to come from somewhere and often charges, through taxes, the same industry that needs the support. Secondly, the political need to satisfy all stakeholders leads to a fragmentation of the budgets so that in the end, none of the subsidised organisations receive enough money to reach the critical level that is needed in a mondial competition.

The only way to overcome the problem is to develop a regional vision. Political and economic actors need to develop a common R&D subvention vision and decide on what they want to be good at and what NOT. Very often, this vision brings one large and several small companies together around a common technology. A good example is the car telematics 'valley' developed in Sweden around Volvo. Or the creation of SES Astra in Luxembourg. Small countries like Sweden and Luxembourg have the advantage that the political and economic actors easily cooperate on such a joint vision. They have the courage to make a choice. In such a context, worldwide excellence in one specific area becomes possible.