Fact of the Week: The World’s Largest Publicly Funded Applied Research Organization Contributes 1.6 Percent Annually to the German Economy

Source: Allan Grant, et al., “Understanding the macroeconomic Effects of public Research: an Application of a Regression microfounded CGE-model to the Case of the Fraunhofer-Gesellschaft in Germany,” (Karlsruhe, February 2022).

Commentary: As more funding is directed toward public science investment, demand increases for evidence of its returns. However, attempts to study the macroeconomic effects are complicated by interdependence between markets, which include substitution and dynamic, sector-specific effects. To date, most literature instead takes a microeconomic approach that measures specific relationships between individual firms and organizations. To address this gap, Grant et al. created a model to estimate the macroeconomic effect of public science investments by measuring the contributions of the German Fraunhofer-Gesellschaft, the world’s largest nonprofit organization for applied research (RTO). They found that it contributes approximately 1.6 percent annually to the German economy; that it produces investment effects of €15.2 billion, creating 437,000 jobs; that it increases government revenue by €14 billion (mostly through additional taxes on labor and increased income from capital taxes); and that the jobs created center in the motor vehicle, computer and electronics, machinery, chemical, and pharmaceutical industries.

The methodological approach Grant et al. used is novel in its use of both regressions (which have been controlled for various biases, allowing for an accurate look at interconnected markets) and a computable general equilibrium (CGE) model, which essentially compares the state of the German economy with and without Fraunhofer’s effects. This two-part analysis allows for economic analysis of the direction and magnitude of effects circulating through the economy, and the differences in effects by sector. The results corroborate other findings that returns to science and innovation are often multiple times the amount of the initial investment, and are generally higher than other types of investment. Further, RTOs provide a particular type of R&D output that is more commercializable by firms than university R&D, such that the absence of Fraunhofer activities cannot be easily substituted by private actors.

The results substantiate the need for applied public research investments in RTOs and their economic relevance, while also presenting a few additional findings: The government revenue generated by the additional economic activities more than makes up for the initial spending necessary to finance Fraunhofer’s budget, and knowledge-intensive industries and those industries most closely linked to Fraunhofer benefit the most from its stimulating effects, which travel out through its supply chains to benefit connected industries as well.