Cost-Benefit Analysis for R&D Program Evaluation Jiyoung Park

2 Contents Feasibility Analysis on R&D Programs Discussions Practices Economic Analysis

Feasibility Analysis on R&D Programs

4 Purpose  Substantiate the feasibility of large-scale public investment R&D programs  Enhance fiscal efficiency and productivity Subjects  Newly proposed programs of budget plans over $50 M  Programs with concrete plans on technology development Feasibility Analysis system has been legislated by the end of Feasibility Analysis on R&D

5 Process DemandGoalsContents Resources Plan Expected Effects Alternatives GeneralCriteria Uncertainties OverallAssessment Success Success Timing Timing Benefits Benefits Do ? Do not ?

6 Components Technical Analysis  Overlapping of existing programs, Research development plan, Potential to technical success, etc. - Systematic model approach  Output analysis (Patent, License, Publication and citation)  Surveys Policy Analysis  Relevance to national strategic plan, National priority, Contingency plans for risks, etc.  National policy and priorities  Relevant issues and alternative plans

7 Economic/Impact Analysis  Economic benefit, Economic spill-over, Social spill-over, Scientific/Technical spill-over, etc.  Input-Output Analysis, Patent Analysis etc.  Cost-Effective Analysis, Cost-Benefit Analysis  Surveys Overall Assessment based on Technical/Policy/Impact Analysis (Analytical Hierarchy Process)  Determine relevant importance of each criteria  Maintain balance between qualitative & quantitative analysis Components

Economic Analysis

9 Cost & Benefit Analysis Economic metrics for Cost/Benefit  NPV (Net Present Value) = Amount willing to pay now for the future benefit  IRR (Internal Rate of Return) = Rate of return if NPV is zero  C/B Ratio = Ratio of discounted cash flows Types of benefit  Direct/Indirect, Tangible/Intangible, Economic/Non-economic … First step is to be aware of the characteristics of R&D  Very high uncertainty, very high payoffs : internet, Life science, Solar energy …  Seed corn for the future, especially the early stage R&D

10 ProgramsBenefitsExamples Basic Research ․ Scientists training ․ Patents on fundamental technology ․ Prior occupation of high-tech R&D ․ (Economic benefit) Infrastructure building for Academic Research Creative Research Programs R&D for Public Health & Welfare ․ Improvement of quality of life ․ Reduction of social cost ․ Reduction of environmental pollution ․ Energy and resources security ․ (Economic benefit) Alternative energy development Technology development for Public health Industrial Technology Development ․ Improvement of industrial competitiveness ․ Potential to commercialization ․ Potential to job creation ․ Economic benefit Development of component materials Frontier R&D program Types of Benefits

11 Applications to R&D Programs Industrial R&D  Need to prove expected benefit exceeds projected cost  B/C result for major decision criteria R&D for Public Welfare  Combined tangible & intangible benefits  B/C result for provide alternatives Basic Research  Do not need to calculate B/C  Sometimes proves justification of public investment

12 Assessment of Costs R&D activities for providing infrastructure  Research centers, Fabrication facilities, Large R&D facilities such as Accelerators  Cost calculation based on design, construction cost, etc. R&D activities for producing knowledge, intellectual properties  DB for categorized program cost DB  R&D stages, R&D objectives, R&D field, etc.  Provides range of investment Indirect costs are not considered. Sunk costs are not considered.

13 Assessment of Costs

14 Assessment of Benefit Approaches based on market size Projected Market Size Expected Market Share Profits Contribution of R&D Market research Technology forecast Market analysis Patent analysis Value-added rate -Published by Bank of Korea -Published by Bank of Korea R&D Contribution to GDP growth by industry

15 Assessment of Benefit

16 Assessment of Benefit Approaches based on performance data Expected # of Patents Business from the patents Profits Contribution of R&D Performance analysis data of similar programs Follow-up monitoring of similar programs R&D Contribution to GDP growth by industry Value-added rate -Published by Bank of Korea -Published by Bank of Korea

17 Assessment of Benefit Approaches based on synergies among investments Expected increased # of papers Spin-offs by unit input Benefits from R&D Case studies - Integration, new facilities Averaged over 3 years Case studies - multiplier effect

18 Assessment of Benefit Approaches based on cost avoidance Expected # of users Cost avoidance (in use of R&D facility) User data - Current and future demand Traveling cost Time-saving

PracticesPractices

20 Examples – Targeting Economic benefit New drug discovery (target materials) ScenariosB/CNPVIRR(%) Case-A Royalty 5%0.31-2, Royalty 10%0.62-1, Case-B Royalty 5%0.62-1, Royalty 10%   Reduced initial investment was recommended   Increased investment will be considered after 4-year program monitoring

21 Examples – Combined benefits Fusion Research for environment   Rejected for R&D program targeting industrialization   Recommended small investment for early-stage fusion research SDC 4.5%SDC 5.5%SDC 6.5% Category Category Category Category Category Total

22 Examples – Intangible benefits Basic Research for Clean Energy   Never used the numbers for decision making   Provide justification of governmental investment SDC Case1Case2 NPVB/CNPVB/C

DiscussionsDiscussions

24 Discussions Heroic calculation?  Not a real data  Need guidelines of boundaries Need more intense data on program performance Need to know more on the mechanism of success or fail to reduce uncertainty Need guidelines combining B/C result and cost-effectiveness to make decision We still want to apply cost-Benefit analysis on R&D`!