R&D Funding Impact Varies by Competence Group

University of Helsinki

Skills and innovations, as well as the employment and productivity that they enable, fund the maintenance of our wellbeing. Besides increasing funding for research and development, we must ensure that the allocation and long-term nature of this investment results in strong, writes Professor of Practice Martti Hetemäki.

Sustainable economic growth based on expertise and novel technical solutions contributes to funding the maintenance of our wellbeing.

Public funding for research and development is based on its economic externalities. Such economic externalities apply to, for example, basic research conducted at universities. Basic research as such does not lead to practical applications, but increases understanding and therefore contributes to the creation of applications.

Economics emphasises the importance of public authority in the funding of basic research, as its externalities have substantial effects. Instead of being mutually exclusive, basic research and innovation complement each other. The majority of innovations are also largely based on applying research carried out elsewhere, utilising the high level of skills available in Finland. New technical solutions can only be introduced through the necessary expertise.

How to increase R&D expenditure to 4% of GDP

At the beginning of 2023, the act on government funding for research and development for the period 2024-2030 came into force. The aim of the legislation is to increase R&D expenditure to 4% in relation to gross domestic product (GDP) by 2030.

The share of the public sector in the 4% target is a third, or 1.33%. In Finland, the government covers an estimated 90% of the share of the public sector. Consequently, the government's R&D funding should rise to 1.2% of GDP by 2030.

Assuming an annual GDP growth rate of 2%, the legislative proposal now enacted as law would increase the amount of governmental R&D funding by 2030, as illustrated by the blue dotted line in the graph below. In this case, the average annual increase in the amount of research and development funding awarded by the government in the period 2000-2030 would be 2.7%.

Sources: Statistics Finland and calculations by Martti Hetemäki.

The key role of competence clusters

The new act provides for a plan concerning the funding of R&D activities. This plan, which extends beyond a single parliamentary term, guides the use and content of government funding. Funding must be available for allocation and predictable to allow the establishment and continuity of competence clusters.

In turn, competence clusters are key to significant innovations. An example of such concentration of expertise is InstituteQ - The Finnish Quantum Institute founded by Aalto University, the University of Helsinki and the VTT Technical Research Centre of Finland.

To establish strong ecosystems, long-term funding of competence clusters is critical for creating enough businesses to develop and utilise the efforts carried out in these clusters. Strong ecosystems attract domestic and international top-level experts. Through ecosystems, the benefits of innovations also spread to the private and public sectors throughout the country.

Martti Hetemäki is Professor of Practice at the Helsinki Graduate School of Economics

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