Organization for Economic Co-Operation and Development

THE KNOWLEDGE-BASED ECONOMY

Paris 1996

II. THE ROLE OF THE SCIENCE SYSTEM IN THE

KNOWLEDGE-BASED ECONOMY

A. Introduction

A country's science system takes on increased importance in a knowledge-based economy.  Public research laboratories and institutions of higher education are at the core of the science system, which more broadly includes government science ministries and research councils, certain enterprises and other private bodies, and supporting infrastructure.  In the knowledge-based economy, the science system contributes to the key functions of: i) knowledge production – developing and providing new knowledge; ii) knowledge transmission – educating and developing human resources; and iii) knowledge transfer – disseminating knowledge and providing inputs to problem solving.

Despite their higher profile in knowledge-based economies, science systems in OECD countries are now in a period of transition.  They are confronting severe budget constraints combined with the increasing marginal costs of scientific progress in certain disciplines.  More importantly, the science system is facing the challenge of reconciling its traditional functions with its newer role as an integral part of a larger network and system – the knowledge-based economy.

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B. Knowledge production

The science system has traditionally been considered the primary producer of new knowledge, largely through basic research at universities and government laboratories.  This new knowledge is generally termed “science” and has traditionally been distinguished from knowledge generated by more applied or commercial research, which is closer to the market and the “technology” end of the spectrum.  In the knowledge-based economy, the distinction between basic and applied research and between science and technology has become somewhat blurred.  There is debate as to the exact line between science and technology and whether the science system is the only or main producer of new knowledge.  This debate is relevant because of different views on the appropriate role of government in funding the production of various types of knowledge.

Scientific knowledge is broadly applicable across a wide and rapidly expanding frontier of human endeavour.  Technological knowledge stems more from the refinement and application of scientific knowledge to practical problems.  Science has been considered that part of knowledge which cannot or should not be appropriated by any single member or group in society, but should be broadly disseminated.  It is the fundamental knowledge base which is generic to technological development.  Because of this, much of science is considered a “public good”, a good in which all who wish can and should share if social welfare is to be maximised.  The public-good character of science means that, like other public goods such as environmental quality, the private sector may under-invest in its creation since it is unable to appropriate and profit adequately from its production.

The government therefore has a role in ensuring and subsidising the creation of science to improve social welfare, just as it does in regulating environmental protection.

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Some argue that there is no longer a meaningful distinction between science and technology in the knowledge-based economy (Gibbons et al., 1994).  They present the view that the methods of scientific investigation have been massified and diffused throughout society through past investments in education and research.  The consequence is that no particular, or each and every, site of research investigation, public or private, can be identified as a possible originating point for scientific knowledge.  In addition, there may no longer be a fundamental difference in the character of scientific and technological knowledge, which can be produced as joint products of the same research activity.

Studies of the research process have demonstrated that incremental technological improvements often use little scientific input and that the search for technological solutions can be a productive source of both new scientific questions and answers.  As a result, the traditional base of the science system, research institutions and universities, cannot be assumed to dominate the production of scientific knowledge.

In this view, firms in the private sector will invest in basic research, despite its possible spillovers to competitors, if they can capture enough value from the use or process of pursuit of this knowledge in their other activities to justify investing in its creation.  This argument suggests a major revision in the justification of public support for scientific research and the need for policies to focus on the interaction among all the possible sources of scientific knowledge.  Public funding of research might be needed to increase the variety of exploitable knowledge that might eventually find its way into commercial application.  For these scholars, the extent to which scientific knowledge can be appropriated, directly or indirectly, makes it necessary to modify or reject the idea that science is apublic good.

In recent years, the proportion of total research and development (R&D) financed by industry has increased relative to the government share in almost all OECD countries.  Industry now funds almost 60 per cent of OECD R&D activities and carries out about 67 per cent of total research (Table 4).  At the same time, however, overall growth in R&D spending is declining.  In the OECD countries, growth in national R&D spending has been on a downward trend since the late 1980s, and it fell in absolute terms in the early 1990s.  R&D expenditures have now levelled off to account for about 2.3 per cent of GDP in the OECD area.  Within this slowing R&D effort, it is believed that spending on basic research may be suffering in some countries (although not in the United States where the share of basic research in the overall R&D effort has grown).  In some major OECD countries, government funding for basic research is not increasing, and in some important areas it is decreasing.  At the same time, the private sector appears to be cutting back on long-term, more generic research projects.

There is also some scepticism as to the ability of the private sector to conduct adequate amounts of truly basic research.  In industry, basic research tends to be a search for new knowledge that may be applicable to the needs of a company; it is not usually research driven simply by curiosity or more general demands.  It is also a small part of the overall industrial R&D effort.  In the United States, for example, industry R&D spending is 70 per cent on development (design, testing, product or process prototypes and pilot plants), 22 per cent on exploratory or applied research and 8 per cent on basic research (IRI, 1995).  There are important questions as to whether sufficient scientific knowledge would be generated without government assistance and subsidies.  There are calls for more international co-operation in basic research to economise on resources and achieve the scale benefits of joint activities.  But in the long term nations that have not invested in the production of science may be unable to sustain advances in the knowledge-based economy.

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C. Knowledge transmission

The science system is a crucial element in knowledge transmission, particularly the education and training of scientists and engineers.  In the knowledge-based economy, learning becomes extremely important in determining the fate of individuals, firms and national economies.  Human capabilities for learning new skills and applying them are key to absorbing and using new technologies.  Properly-trained researchers and technicians are essential for producing and applying both scientific and technological knowledge.  The science system, especially universities, is central to educating and training the research workforce for the knowledge-based economy

Data show that the production of new researchers in the OECD may be slowing along with lower growth of R&D investments (Table 5).  In the 1980s, there was substantial growth in the number of researchers in the OECD area (defined as all those employed directly in R&D in the public and private sectors), almost 40 per cent in 1981-89 or the equivalent of 65 000 to 70 000 new researchers per year.  However, this was less rapid than the 50 per cent growth in R&D expenditures in the same period.  Both spending and human resource development are proceeding at a slower pace in the 1990s.  The growth in researchers in universities and government research institutions has been slower than in the private sector, which employs about 66 per cent of OECD research personnel.

Regardless of their sector of employment, these human resources are produced by the science system.  Less research in universities, laboratories and industry means fewer careers in science and insufficient development of future scientists and engineers.  In addition to lower research budgets, universities are facing other difficulties.  One problem is providing a broad-based education to an increasing number of citizens while also directing high-level training through research at the graduate and post-graduate levels.  In most OECD countries, there has been a sharp increase in both the number of students and the proportion of young people enrolled in higher education, leading to tensions between educational quantity and quality.

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Universities confront the need to continue high-quality research and research training in the context of diminishing resources and more overall student demands. At the same time, there appears to be a divergence developing between marketplace needs for new researchers and the qualifications and orientation of the supply of new doctorates. There is a third problem of gaining the interest of young people in careers in science, which could have serious implications not only for the availability of researchers and engineers, but also for the awareness of the general public with regard to the economic value of science and technology.

The science system is thus facing challenges in reconciling its knowledge production role, even more important in the knowledge-based economy, and its knowledge transmission or educational function. Many people believe that the primary mission of the university is educational, reproducing and expanding the stock of individuals that embody the accumulated knowledge and problem-solving skills needed in modern societies. The fact that universities are, to varying degrees among the OECD countries, also involved in the creation of new knowledge may be seen as a by-product or joint product of their educational mission. In practice, the educational mission of universities shapes their approach to conducting research through the assignment of important research roles for students and their participation in technical activities. As universities attempt to find ways around fiscal limitations, there may be substantial variety in the extent to which they maintain the primacy of their educational mission. Resource constraints make it more difficult to maintain the necessary linkages and balance between research and education.

D. Knowledge transfer

The science system plays an important role in transferring and disseminating knowledge throughout the economy. One of the hallmarks of the knowledge-based economy is the recognition that the diffusion of knowledge is just as significant as its creation, leading to increased attention to “knowledge distribution networks” and “national systems of innovation”. These are the agents and structures which support the advance and use of knowledge in the economy and the linkages between them. They are crucial to the capacity of a country to diffuse innovations and to absorb and maximize the contribution of technology to production processes and product development.

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In this environment, the science system has a major role in creating the enabling knowledge for technological progress and for developing a common cultural basis for the exchange of information.

Economies are characterised by different degrees of “distribution power” in their ability to transfer knowledge within and across networks of scientific researchers and research institutions. The distribution power of an economy depends partly on the incentives and existence of institutions, such as those of higher education, for distributing knowledge. Effective distribution of knowledge, however, also depends upon investing in the skills for finding and adapting knowledge for use, and in developing bridging units or centres. There are thus choices to be made between investments in the production of, and in the capabilities for diffusing and using, scientific knowledge.

In the knowledge-based economy, the science system must balance not only its roles of knowledge production (research) and knowledge transmission (education and training) but also the third function of transferring knowledge to economic and social actors, especially enterprises, whose role is to exploit such knowledge. All OECD countries are placing emphasis on developing linkages between the science system and the private sector in order to speed knowledge diffusion. As a result, incentives are being given by governments for universities and laboratories to involve industrial partners in the selection and conduct of their research activities.

In the case of higher education, university/industry collaborations bring with them opportunities to increase the relevance of the university's educational mission and to stimulate new research directions. They provide a means both for the efficient transfer of economically useful knowledge and for advanced training in skills required by industry. Traditionally, much of the knowledge produced in public facilities and universities has been prohibited from being patented by the private individuals involved in creating it, and salaries and equipment have been paid out of public funds. Now, joint research projects and other linkages are calling heightened attention to economic issues such as exclusive licensing, intellectual property rights, equity ownership, conflict of interest, length of publication delays and commingling of funds.

There are other issues, however, that may create a more profound effect on the contribution of universities to science. Large amounts of industry research funding may induce the participating universities to specialise their efforts in ways that will prove detrimental over the long run to the range and character of research they are able to conduct. An increasing share (as much as 50 per cent in some universities) of the resources allocated to university research is derived from contracts with industry, thus making the universities more and more dependent on the private sector for funding and steering the overall research activity in a more commercial direction. As university/industry collaboration becomes the norm in many areas of basic research, the traditional contribution of academia to the production of scientific knowledge may weaken under the burden of increasing its economic relevance.

There are also concerns that university/industry collaboration is tending to consolidate excellent researchers in a handful of universities or research centres. Collaborative efforts often require geographic proximity and a large base of expertise to establish complementary infrastructure and to assure the transfer of relevant knowledge. Such concentrations of research, whether organised as science parks or simply arising from the concentration of existing industrial research activities, may disadvantage smaller schools or centres. Moreover, concentration of research efforts may constrain the ability of the excluded institutions to offer students contact with high-quality research efforts. However, these concerns may be unfounded in light of the increasing ability for researchers to be linked electronically through information and communications technologies.

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The public or governmental component of the science system is facing many of the same questions. The structure of research councils is being modified to emphasise strategic areas, to promote synergies between disciplines and to involve the private sector. Industry is being asked to help define the areas in which research, including basic research, should be done. Government laboratories are forming joint ventures with the private sector. In the knowledge-based economy, governments are earmarking more funds for science activities considered to merit priority by virtue of their economic and social relevance (such as information technology and biotechnology). But this may lead government research organisations to be so susceptible to changes in national priorities and needs that it may invalidate or fundamentally alter their research missions. In addition to forming linkages with industry to further the diffusion of knowledge, universities and laboratories are more frequently asked to directly contribute to problem solving in technological investigations. Despite its generic character, the science system has always been important for generating knowledge about fruitful opportunities and practical dead-ends in more applied research and for contributing directly to strategic or commercial outcomes. This problem-solving function is being given more emphasis in the knowledge-based economy. For example, the advent of flexible manufacturing systems has created new demands for scientific insights into materials, production processes and even management. The growing preponderance in economic output of service industries requires scientific knowledge on organisational improvements and networking to sustain productivity advances. Similarly, much of the new information and communication technologies are science-based, and science still has much to offer to help these technologies maximise their contributions to production and employment.

In part because of its increased importance in the knowledge-based economy, the science system finds itself torn between more traditional areas of research and investigations that promise more immediate returns. Many argue that if scientists are to create the knowledge that will generate the new technologies of the next century, they should be encouraged to have their own ideas, not continue with those that industry already has. There should be sufficient scope to allow scientists to set research directions guided by their own curiosity, even when these are not seen as immediately valuable to industry. On the other hand, some of the most important scientific insights have come from the solution of industrial problems. The knowledge-based economy is raising the profile of the science system, but also leading to a more intense probing of its fundamental identity.

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E. Government policies

Even though we know the contributions of the science system to the production, transmission and transfer of knowledge, there has not been great progress in measuring the extent of these contributions. A related problem is establishing a standard of accountability for public research funding, a problem that is of growing significance for future government support of the science system. Although there is widespread belief that public funding for scientific research has produced substantial benefits, there is concern with how these benefits may be measured and related to funding levels.

Efforts to measure the contribution of scientific knowledge to the economy are difficult for several reasons. First, because most scientific knowledge is freely disclosed, it is hard to trace its use and therefore its benefits as it is employed within private economic activities. Second, the results of scientific investigation are often enabling rather than directly applicable to technological innovation, further obscuring any overt trace of their beneficial impact. Third, new scientific knowledge may save resources that would otherwise be spent in exploring scientific or technological dead-ends and

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these resource savings are not observed. As a result, cost-benefit analysis, a leading method for evaluation of public investments, is likely to understate the benefits of scientific research.

Efforts to more precisely define and measure the science system are occurring in an era of growing public financial stringency throughout the OECD countries. Current indicators offer little assistance in addressing the overall impact of science on the economy or for evaluating how funding allocations should be made between newly developing and established fields of investigation. The need for a better understanding of the contributions of the science system to OECD economies is heightened by debates about the nature of scientific knowledge and the role of governments.

Adding to, and complicating, these issues is the evolving role of the science system in diffusing and transferring knowledge to the private sector to enhance economic growth and competitiveness. The challenge for the science system, and for governments, is to adapt to its new role in the knowledge-based economy while not losing sight of the essential need for sufficient levels of pure, generic non-commercial research.

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