R&D subsidies: East heads West

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Aad Vredenbregt operates Valoli.

Finding common principles to govern industrial subsidies will be pivotal in ensuring a balanced and equitable global economic landscape, argues Aad Vredenbregt.

As the Dutch nation was gearing up for elections, politicians were keen on placating the electorate with nice things during this year’s annual state budget debates. Looking for money to cover their proposals, some politicians even didn’t shy away from putting their hands in the coffers of the National Growth Fund (NGF), which was set up for the express purpose of driving long-term growth. This made me realize there’s a huge difference between Western and Eastern economies with respect to subsidizing R&D.

The ease with which politicians managed to extract money from the NGF illustrates our underestimation of the grant instrument. To remain competitive, it’s important that Dutch R&D spending is increased generically to at least 3 percent of GDP (Lisbon target). This won’t lead to an advantage over neighboring economies but reduce a backlog.

Although it’s still controversial whether subsidies correlate with productivity growth or merely are a direct transfer of resources from a public entity to an economic actor, studies of Dutch industry by TNO showed the high value of R&D intensity for the entire Dutch economy. In her book “The entrepreneurial state: debunking public vs. private sector myths,” Mariana Mazzucato explains that government plays a much bigger role in innovations than is often assumed.

Few countries spend like China, but the effect of government subsidies on the economy remains equally controversial, even as the country has become the world’s leading industrial base over the past twenty years. It’s commonly assumed that China strives to spend 5 percent of its GDP on industrial programs.

Compared to many Western regions, a fundamental distinction lies in the scale, strategic focus and centralization of subsidies. The Chinese government considers subsidies as strategic in the search to advance the overall economic well-being of the country by earning foreign exchange, promoting technological development, developing an industry that the government views of vital importance, or otherwise enhancing its competitiveness. China’s centralized approach allows for rapid decision-making and large-scale investments in strategic sectors.

The US federal government similarly invests in R&D, aiming to bolster the competitive edge of its industries (including defense). Traditionally, however, the Netherlands, as part of the European Union, adopts a more diversified approach. The EU emphasizes social welfare programs and education, viewing these investments as integral components of a thriving industrial ecosystem. Brussels plays a substantial role in coordinating subsidies. And although the EU operates under a more centralized regulatory framework than the US, this centralization is hampered in consistency by the need for subsidy allocation across member states.

Another major difference is transparency. Western nations typically ensure transparency, accountability and adherence to international trade rules, whereas the Chinese government doesn’t keep an open registry of its public subsidies. The lack of transparency could promote unfair competition. This causes a challenge for Western industries to compete with Chinese businesses on an equal footing.

Chinese and Western subsidy schemes highlight the diverse economic philosophies and priorities that shape global trade. As the world becomes increasingly interconnected, finding common principles to govern industrial subsidies will be pivotal in ensuring a balanced and equitable global economic landscape, benefiting businesses and consumers worldwide.