Cost-Benefit Analysis Cost-Benefit Analysis for R&D Program Evaluationfor R&D Program Evaluation

Cost-Benefit Analysis Cost-Benefit Analysis for R&D Program Evaluationfor R&D Program Evaluation

2008. 112008. 11Jiyoung ParkJiyoung Park

jypark@kistep.re.krjypark@kistep.re.kr

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ContentsContents

Feasibility Analysis on R&D Programs

Discussions

Practices

Economic Analysis

Feasibility Analysis on R&D Feasibility Analysis on R&D

ProgramsProgramsFeasibility Analysis on R&D Feasibility Analysis on R&D

ProgramsPrograms

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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 2006.

Feasibility Analysis on R&DFeasibility Analysis on R&D

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ProcessProcess

DemandDemand

GoalsGoals

ContentsContents

Resources PlanResources Plan

Expected EffectsExpected Effects

AlternativesAlternatives

General General CriteriaCriteria

UncertaintiesUncertaintiesOverallOverall

AssessmentAssessment

SuccessSuccess

TimingTiming

BenefitsBenefits

Do ?Do ?

Do not ?Do not ?

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ComponentsComponents

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

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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

ComponentsComponents

Economic AnalysisEconomic AnalysisEconomic AnalysisEconomic Analysis

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Cost & Benefit AnalysisCost & 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

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Programs Benefits Examples

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 BenefitsTypes of Benefits

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Applications to R&D Applications to R&D ProgramsPrograms

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

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Assessment of CostsAssessment 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.

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Assessment of CostsAssessment of Costs

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Assessment of BenefitAssessment of Benefit

Approaches based on market size

Projected Market SizeProjected Market Size

Expected Market Expected Market ShareShare

ProfitsProfits

Contribution of R&DContribution of R&D

Market researchMarket research

Technology Technology forecastforecast

Market analysisMarket analysis

Patent analysisPatent analysis

Value-added rate Value-added rate

-Published by Bank of Korea-Published by Bank of Korea

R&D Contribution to R&D Contribution to

GDP growth by industryGDP growth by industry

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Assessment of BenefitAssessment of Benefit

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Assessment of BenefitAssessment of Benefit

Approaches based on performance data

Expected # of PatentsExpected # of Patents

Business from the Business from the patentspatents

ProfitsProfits

Contribution of R&DContribution of R&D

Performance analysis dataPerformance analysis data

of similar programs of similar programs

Follow-up monitoringFollow-up monitoring

of similar programsof similar programs

R&D Contribution to R&D Contribution to

GDP growth by industryGDP growth by industry

Value-added rate Value-added rate

-Published by Bank of Korea-Published by Bank of Korea

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Assessment of BenefitAssessment of Benefit

Approaches based on synergies among investments

Expected increased # Expected increased # of papersof papers

Spin-offs by unit Spin-offs by unit inputinput

Benefits from R&DBenefits from R&D

Case studies Case studies

- Integration, new facilities- Integration, new facilities

Averaged over 3 yearsAveraged over 3 years

Case studiesCase studies

- multiplier effect- multiplier effect

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Assessment of BenefitAssessment of Benefit

Approaches based on cost avoidance

Expected # of users Expected # of users

Cost avoidance Cost avoidance (in use of R&D (in use of R&D

facility)facility)

User dataUser data

- Current and future - Current and future demanddemand

Traveling cost Traveling cost

Time-savingTime-saving

PracticesPracticesPracticesPractices

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Examples – Targeting Economic Examples – Targeting Economic benefitbenefit

New drug discovery (target materials)

Scenarios B/C NPV IRR(%)

Case-A

Royalty 5% 0.31 -2,333 -0.28

Royalty 10%

0.62 -1,283 3.08

Case-B

Royalty 5% 0.62 -1,275 3.10

Royalty 10%

1.25 833 6.65

Reduced initial investment was recommended

Increased investment will be considered after 4-year program monitoring

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Examples – Combined benefitsExamples – 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-1 1.23 1.03 0.93

Category-2 0.82 0.74 0.67

Category-3 0.45 0.41 0.37

Category-4 0.18 0.16 0.14

Category-5 0.10 0.09 0.08

Total 0.70 0.64 0.58

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Examples – Intangible benefitsExamples – Intangible benefits

Basic Research for Clean Energy

Never used the numbers for decision making

Provide justification of governmental investment

SDCCase1 Case2

NPV B/C NPV B/C

3.5 -587.7  0.41 -341.0  0.66

4.5 -596.0  0.37 -383.3  0.60

5.5 -599.0  0.34 -415.3  0.54

6.5 -598.0  0.31 -438.9  0.49

7.5 -593.9  0.28 -455.6  0.45

DiscussionsDiscussionsDiscussionsDiscussions

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DiscussionsDiscussions

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`!

jypark@kistep.re.krjypark@kistep.re.kr