Innovations by private companies, in the form of new products, services or production processes, are the most important drivers for a long-term improvement in material prosperity. That means they are also crucial for solving major societal challenges such as combating climate change, developing new antibiotics against resistant bacteria or providing solutions to cyberattacks.
Such private sector activities depend to a large extent on scientific advances in basic research, and are supported and funded by the public sector. In Western industrialised countries, this usually happens in three ways:
- One, the majority of basic research and a smaller proportion of applied research are either carried out directly by the public sector or funded by it. Basic research supports applied research in the private sector by conducting independent research, transferring its knowledge and technologies to companies, stimulating the creation of innovative companies and fostering its own spin-offs.
- Two, countries can promote innovative activities in the private sector through subsidies or tax incentives for research and development (R&D). These forms of industrial policy have recently gained in importance around the world.
- Three, governments can provide infrastructure such as technology centres or funding for specific research in order to direct R&D activities towards certain technologies or applications.
Switzerland - a unique systemIn Switzerland, the public sector supports the country’s innovation system by focusing on basic and applied research and combining them with programmes that link universities and industry. Swiss industry receives comparatively few direct subsidies aimed at strengthening its innovative capacity.
"Switzerland is the most innovative country in the world, but its lead has shrunk."
There are multiple reasons for this "Swiss way" of holding back on direct subsidies. For one, Switzerland is still home to many companies with a relatively high level of in-house R&D - for example, in the pharmaceutical and medtech industries, in manufacturing in general and in the information and communication technology industries. Our country also has a long tradition of free trade and capital. After all, our export-oriented industry is accustomed to holding its own in fierce international competition with technology leaders.
Switzerland’s lead is shrinkingThe Swiss innovation system and the Swiss economy are facing several challenges. First, fewer companies are conducting their own R&D, as innovation activities are expensive and international competition is catching up. Second, China, the EU as a whole, individual EU countries and the US have launched large-scale industrial subsidy programmes to reduce their dependency on foreign countries and strengthen their own economies. Third, the OECD countries have decided to introduce a minimum tax on corporate profits. This could reduce the attractiveness of Switzerland as a business location, as such a tax would affect a considerable proportion of value added.
Staying out of the subsidy raceHow should Switzerland react in this new setting? In our view, joining the subsidy race of these countries isn’t a promising option. The benefits of such an industrial policy - however carefully conceived - are very limited as a rule. In addition, Switzerland is too small to become self-sufficient in key technologies or even in individual product categories. Any attempt to increase subsidies would be extremely costly and is doomed to fail.
Hans Gersbach is Co-Director of KOF Swiss Economic Institute and Professor of Macroeconomics, Innovation and Policy at ETH Zurich.
Martin Wörter is Adjunct Professor and Head of the Innovation Economics Research Division at the KOF Swiss Economic Institute, ETH Zurich.
Naturally, it makes sense to ensure security of supply for a few key products and components through diversification and warehousing. To this end, we should revise our concept for security of supply and refocus it on resilience and flexibility. A good innovation system will then be useful, as it can enhance the resilience of the Swiss economy and can provide flexible responses to bottlenecks for certain products.
Knowledge and technology transfer benefits the economyA strong public research sector, combined with continuous improvement of its capacity for knowledge and technology transfer, remains the best strategy in this new environment. Transferring knowledge and technology from the public to the private sector gives companies access to the "raw materials" of qualified labour, advanced knowledge and the latest technologies, as well as to the infrastructure of Swiss institutions of higher education and research. This transfer has the potential to overcome most expected challenges.
"Switzerland should continue to invest in its proven research and innovation system."
With regard to R&D, there are several ways to counteract the OECD minimum tax. For example, besides fostering the transfer of knowledge and technology, one option would be to extend the cantonal tax credits for corporate R&D; another is to adjust the funding conditions at Innosuisse, the Switzerland’s innovation agency.
To sum up, maintaining and strengthening Switzerland’s existing innovation system is an essential part of an appropriate response to the current challenges. The knowledge and technologies that public educational institutions provide, and the transfer of knowledge to the private sector, are an important resource for the Swiss economy. This is why, despite its strained financial situation, the federal government should invest further in the country’s proven research and innovation system. Of course, it is equally important to ensure that entrepreneurship thrives and to maintain - and whenever possible, to improve - framework conditions such as open access to international markets for goods, services and researchers.
This opinion piece also appears in the NZZ of 07.02.2024.