calendar tag arrow download print
Image
fact sheet
28 August 2020

Two and a half percent

R&D Innovation Funding Finance
Expenditure on research & development (R&D) in the Netherlands has been between 1.64% and 2.18% of gross domestic product (GDP) for more than fifty years. The large multinationals that together account for about 60% of all industrial R&D in the Netherlands also invest more in R&D than their counterparts worldwide do on average. That means that the desire to move towards an R&D intensity of 2.5% of GDP is not a matter of industry and government investing a little more; in actual fact, it is a call to change the economic structure of the Netherlands.

In het kort:

  • De Nederlandse R&D-uitgaven zijn sterk gestegen: van een half miljard in 1964 tot 16,6 miljard euro in 2018.
  • De R&D-uitgaven als percentage van het bbp bewegen zich al meer dan 50 jaar tussen 1,64% tot 2,18% van het bbp.
  • Nederland heeft als streefgetal 2,5% van het bbp bepaald.

R&D and gross domestic product

Overall expenditure on research & development (R&D) can be broken down into a government share and an industry share. These two shares also encompass international components, namely those of foreign governments and foreign firms that invest in R&D in the Netherlands. The size of R&D investments can be expressed in euros or relative to the size of the economy, measured by gross domestic product (GDP). Long time series are available for both, covering the period from 1964 to 2018.

The underlying rationale behind R&D investment is that it is vital to our knowledge society. To keep pace with trends and developments in the United States and Asia, European governments and firms should together spend 3% of GDP annually on R&D (Europe 2020 strategy objective). The EU objective of 3% was first mentioned in 2000, in the Lisbon Treaty. A decade later, the EU drafted the Europe 2020 strategy. Based on the international average, the expectation is that a third of this investment should come from the public sector and two thirds from industry. Given the structure of its economy, the Netherlands has set itself a target of 2.5% of GDP.

R&D figures for the Netherlands

Nominal investment in R&D in the Netherlands is shown in the following figure (in millions of euros):

The figure above shows that total R&D expenditure has risen sharply since 1964. Whereas spending on R&D amounted to no more than half a billion euros at that time, by 2018 it stood at 16.6 billion euros. Industry accounts for the largest share of total R&D investment. It should be noted that government tax measures (under the Research and Development (Promotion) Act (WBSO, 1.2 billion euros) make a significant contribution in this regard.

We repeat the time series below, this time showing expenditure as a percentage of gross domestic product. This is sometimes referred to as R&D intensity.

The figure above shows that the R&D intensity over the entire period falls within a bandwidth of 1.64% to 2.18% of GDP, with a few higher and lower outliers. The total R&D investments can for some years be devided in the part invested by the Dutch government, by the private sector, by private non-profit organisations and foreign investments. Foreign investment in R&D are provided by foreign firms and, in the public sector, the European Union. The overall figure for 2018 is 2.14% of GDP.

The Netherlands' public spending on R&D is more or less in the middle: close to the EU-15 average (the 15 EU Member States in 1995) and slightly above the OECD average (the partnership of 36 economies). This does not include the WBSO tax facilities. See also the factsheet and the data publication on R&D expenditure in an international context

No increase in government R&D expenditure as percentage of GDP

Public expenditure on R&D as a percentage of GDP has been at about the same level for many years. Over the last ten years, it has ranged between 0.63% and 0.71% of GDP. Although government expenditure will grow in absolute terms as a consequence of extra investments from the Dutch Government’s 2017 Coalition Agreement, this will not lead to an increase in public spending on R&D as a percentage of GDP (see: TWIN 2018-2024). This is because the economy is expected to grow faster than government R&D expenditure. 

Increase in industry R&D expenditure also unlikely

At around 1% of GDP, private-sector spending on R&D in the Netherlands is well below the OECD average of 1.5%. In addition, the Netherlands makes significant tax measures available that government uses as a stimulus for R&D investment in industry, under the Research and Development (Promotion) Act (WBSO; in 2017, 1.2 billion euros). To determine whether or not industry is lagging behind in investment and whether there is room for improvement, it is important to consider the structure of the Dutch economy. The Dutch economy consists of sectors that rely heavily on R&D (R&D-intensive) and sectors that invest little in R&D (R&D-extensive). Examples of R&D-intensive sectors are IT/Software, High-Tech, Automotive and especially Pharma. Examples of R&D-extensive sectors are Oil & Gas, Trade, Hospitality and Construction. The mixture of different sectors is consequently a major determining factor for the level of private investment in R&D.

A number of studies show that the Netherlands’ very specific sector structure explains the low level of spending on R&D. Haveman and Donselaar (see the sources listed at the bottom of this page) concluded as early as 2008 that 60% of the Netherlands' arrears in spending can be explained by its sector structure. ING has also pointed out that the Netherlands would score much higher on R&D intensity if its sector structure were taken into account. The OECD has calculated that R&D intensity in the Netherlands would increase by more than half a percent if its sector structure were comparable to the OECD average.

Another approach is to analyse the R&D intensity of firms operating in the Netherlands. To do this, we looked at the 2500 firms that spend the most on R&D worldwide (EU Joint Research Centre). As a group, all these firms have an R&D intensity of 4.14% (741 billion euros spent on R&D). Within this group, we can identify a subset of firms that conduct a large part of their R&D in the Netherlands. This subset consists of more than 30 firms that invest over 10 billion euros in R&D (partly in the Netherlands). If we compare these firms' R&D expenditure with that of their counterparts in the top 2500, we see that almost all of them spend above average, some up to twice as much as the average of their type of industry. The conclusion is that the firms active in R&D in the Netherlands already invest relatively large amounts in research and development.  It is therefore unlikely that the R&D intensity of these 'Dutch' firms will increase significantly.

Among the R&D-intensive sectors, the Netherlands is mainly active in High-Tech, represented by such firms as Philips, ASML and NXP. We certainly see Pharma, Automotive and IT firms in the Netherlands, but to a much lesser extent than in other countries that are home to very large multinationals, for example Volkswagen (which spent € 13.7 billion on R&D), Alphabet (€ 12.9 billion) or Roche (€ 9.2 billion), the world's leading investors in R&D in Automotive, IT/Software and Pharma respectively. The Netherlands thus has less of a presence in three of the four most R&D-intensive sectors of industry. For an explanation of how we calculated the JRC figures, please see the Appendix on Methodology.

So how do we go from 2% to 2.5%?

In view of the existing firms and the Netherlands’ tradition of public financing, we do not anticipate that 2.5% of GDP is attainable. But is that problematic? After all, there is also money to be made in R&D-extensive sectors such as logistics, hospitality, oil and construction. Whether the Netherlands can achieve the 2.5% objective is not a matter of government and industry spending a bit more, but rather whether it is desirable and possible to change the country’s economic structure. The desire to achieve the 2.5% objective implies that changes in the economic structure are in fact advisable.

The starting point for government's role in making such changes lies in the major challenges facing society: in facilitating the energy transition, in anticipating climate change, in intensifying healthcare, in innovating our agro-food sector, in water management, and in guaranteeing physical safety and cyber security. What all these challenges have in common is that they involve knowledge-intensive sectors. There is also a global market for solutions to these challenges; in other words, these solutions also have export potential. That makes it all the more urgent to increase the R&D intensity of the Netherlands. The relevant choices are vital; targeted investment by both government and industry is indispensable. In the same way that choices were made in the past to invest in R&D in the agro-food and semiconductor industries (ASML), we can also expect to see a return on choosing to invest in societal challenges. Stepping up expenditure to 2.5% of GDP will require not several hundred millions but rather billions of euros (for the figures, see TWIN 2018-2024).

Alternatives:  United Kingdom and Germany

For comparison purposes, we have compiled figures for two neighbouring countries.

Figures for the United Kingdom show that in 1981 the country was still spending more than 2.3% of its GDP on R&D. By the mid-1990s that percentage had dropped to just over 1.5%. Since 2009 the GDP-percentage fluctuates around 1.7%.  We can also see that the downward trend began with declining public spending in the 1980s, followed later by a fall in private investment. Where private investment increases again after 2005, public spending slowly declines further.

The data for Germany show a very different pattern. Before reunification there was a slight increase in spending. Between 1989 and 1996, private-sector spending fell, while public expenditure remained the same percentage-wise (in a country that had become significantly larger). A few years after reunification, there was a sharp increase in R&D expenditure by industry. Government spending first fell slightly and then rose again from 2008 onwards.

    The two countries started out in a similar position about forty years ago, but they went in very different directions, with Germany spending 1.23 percentage points more on R&D than the United Kingdom (2016 figures). Each one’s position now is the total sum of choices made by industry and government, which have played out in very different ways in the two countries. The Netherlands' R&D intensity lies midway between the two. The question is: how do we follow the German example, or would we rather stick close to the British?

    Sources