The Changing Rationale for European University Research Funding: Are There Negative Unintended Consequences?

Journal of Economic Issues, Sept, 2001 by Aldo Geuna

In recent years there has been wide-ranging debate on the advantages and drawbacks of the rationale for resource allocation to university research. The post-World War II rationale for public support of science has been challenged by a more contractual-oriented vision of how to support research. The academic debate has provided a diverse set of descriptions and explanations with some views strongly supporting the contractual-oriented rationale and others critical of it. [1] The debate transcends the academic circle, as illustrated by the large number of national government reports: for example, Commission Jacques Attali (1998) for France, House Committee on Science (1998) for the United States, and National Committee of Inquiry into Higher Education (1997) for the United Kingdom. [2]

This article examines how changes in the rationale for science funding might influence the behavior of universities in European Union (EU) countries and the USA. [3] The article begins by describing the changes in university research funding for a selected group of EU countries during the period 1981-1996 and goes on to analyze the contractual-oriented vision of university research funding and its consequences. The primary focus is on the negative unintended consequences of the new rationale. It is shown that the short-term efficiency gains resulting from the quasi-market incentive structure introduced by the new rationale could be counterbalanced by long-term disadvantages arising from unintended outcomes. This paper does not provide a quantitative comparison between long-run negative effects and expected short-term benefits because it is arduous, if not impossible, to exactly quantify these effects. Instead, the paper provides a critical analysis of the relevance of the negative unintended effects of the n ew contractual-oriented rationale for university research funding. Finally, national specificities in connection with university researchers that are relevant for national policy are subsumed, the purpose here being to create a comparative analysis.

In his original work on US universities, Veblen (1918) proposed economic explanations for the institutional behavior of universities, focusing particularly on the introduction of business principles into university policy. Since this seminal work, it is mainly historians, political economists, and sociologists who have been concerned with understanding the behavior of universities. From the 1960s onward, with the development of human capital theories, economists focused some of their research on the university (e.g., Becker 1975 and Schultz 1960). However, despite this new interest, it was mainly the educational aspects--the contribution of universities to the production of the human capital of graduates or others that leave the university to enter other sectors of the economy-that were taken into account, leaving aside the analysis of the overall behavior of the institution or its specific contribution to society's stock of scientific and technological knowledge. While this research endeavor led to the devel opment of the economics of education, it did not equally promote the development of the economics of university-based research. [4]

At the beginning of the 1960s, Nelson 1959 and Arrow 1962 laid some of the foundations for the current economics of science. [5] These two papers underscore the fact that the properties of non-excludability and non-rivalry in consumption prevent the creator of scientific knowledge from fully appropriating the returns from investments in knowledge creation. Moreover, as the marginal costs of duplicating scientific knowledge are very low, scientific knowledge can be characterized as a public good, which prevents the producer from capturing the benefits stemming from the production of new knowledge. Therefore, market forces are inadequate to deliver the socially optimal level of scientific research. As a result of this market failure, private investment is socially insufficient and the state has a legitimate role in taking responsibility for the support of a sizeable fraction of scientific research.

Scholars in the economics of science have been mainly concerned with analysis of the behavior of the individual researcher. [6] With the exception of the works of P. Dasgupta and P. A. David (1987; 1994), the scholarly work in this area only marginally considers the issues related to the institution where the research is carried out and does not analyze the interactions among the various organizations forming the system of innovation.

Throughout the 1980s and 1990s, attention increasingly has been devoted to the institutional analysis. On one hand a large literature mainly within the framework of political economy, institutional economics, and national systems of innovation has developed theoretical concepts in the broad area of the national systems of innovation useful for the understanding of university behavior. [7] On the other hand, a number of studies have focused on how different micro-decisions and micro-incentives generate perceptible differences in institutional behavior. [8] Most of them originated from, and referred to, the Anglo-American context. Recently, especially in countries such as the United States, the United Kingdom, and Australia, market forces and government-simulated market actions (via performance-based funding systems) have significantly influenced the behavior of universities (Geuna 1999; Massy 1996). These changes toward a stronger market orientation for higher education systems have stimulated further research on the economics of university-based research.