The Fraunhofer Institutes’ funding model

Posted on 29 Jul 2013

In second of a three-part series, Felicity Burch, economist at EEF, blogs on the funding model of the Fraunhofer Institutes and how this contributes to their success.

Fraunhofer Institutes are designed to support applied research

Applied research – or innovation – sits somewhere in between basic research (of the kind conducted by universities) and commercialisation. The German Fraunhofer Institutes are designed to support this, by providing a conduit between universities and industry.

Innovation suffers from many of the same market failures as basic research: in particular it is risky and requires high levels of resources. It is appropriate that there should be a degree of public funding available to support this kind of activity.

The proportion of public funding should depend on closeness to market


In line with this, funding for the Fraunhofer Institutes comes from a mixture of the public and private sectors. The funding model for the UK Catapult centres has been somewhat inspired by the model for the Fraunhofer institutes in that the centres funding should come roughly one third each from:

  • Institutional funding (public sector, guaranteed funds)
  • Competitive funding (public sector, reliant on winning bids for funding)
  • Industry (private sector, competitive)

Ensuring value for money: are resources being duplicated? 

The “one third, one third, one third” model of funding is actually a little more complex than it sounds. There are four streams of institutional funding the Fraunhofer Institutes can access. The first two are more or less guaranteed sources of income, the other two are contingent on meeting other criteria such as industry engagement or accessing European funding.

  1. Base funding: this is a fixed level of funding (approx. €0.6 million) for operating funds that each centre receives for just for being a Fraunhofer Institute
  2. Size contingent funding: funding from government based on the number of employees at the individual institute (and some other performance criteria)
  3. Industry revenue contingent funding: funding from government contingent on industry engagement. The greater the level of industry involvement the more the Institute can receive, though this is capped beyond a certain point to ensure a balance between state/industry involvement
  4. Small additional incentive to access EU funding

The fact that a certain proportion of institutional funding explicitly incentivises business engagement is important to ensure that the centres remain at the cutting edge and are delivering for business. It also means the balance of state vs business funding is maintained at a level that affords the centres with the ability to focus on applied research.

Ensuring value for money: limiting duplication of resources

But now that we’ve got public funds involved, it is important that these kinds of centres deliver value for money for taxpayers.

One concern is that money isn’t wasted on duplication of resources, which is a risk: there are 66 Fraunhofer Institutes after all.

Duplication risks wasting resources; overcoming this this requires oversight. While each Institute has autonomy to determine its own research agenda, the Fraunhofer HQ does have oversight of research activities. If a new Institute wants to be added to the network it could engage in some of the same research areas as other institutes, but it would need to offer something additional as well (for example, offering a different combination of competencies).

Ultimately, though if an Institute is to be added to the network, or remain part of the network, it needs to remain financially viable. This is another way in which the funding model reduces the risks of duplication: a centre can be allowed to fail, so it must remain relevant to businesses.

So why allow overlap?

Some areas of research are pretty broad and can be approached from more than one angle. One such example is welding, and there are five or six Institutes with some kind of competence in this area. These Institutes each focus on a different aspect of welding and – crucially – they network with the other Institutes in the same area.

To some extent the funding model and overarching governance of the Institutes encourages knowledge transfer: some government funding is contingent on partnering with other organisations which can provide an incentive for the Institutes to work together. In addition the existence of the strong Fraunhofer network means that there are links between researchers that are conducive to collaboration. The institutes operate in virtual clusters with one another which are designed to promote close collaboration and limit duplication.

Policy thoughts

There are only seven High Value Manufacturing (HVM) Catapult centres, so one might assume there would be less scope for overlap, but given the way the Catapult has grown up from previously autonomous centres, there are already some areas where there is a risk of duplication: for example the AMRC has competencies in composites, but there is also a National Composite Centre. The German model suggests overlap can sometimes have benefits, but this requires a strong degree of networking between the centres, something the Catapult centres will need to build. In addition, with only seven HVM sites it is arguably more important that each develops a more specialist focus in the longer-term.


Looking at the funding model more broadly, the “one third one third one third” model offers benefits, which the UK Catapult centres have learnt from. The “top up” element of institutional funding, which encourages business engagement is an important element, though, that the UK centres do not yet have. As I noted last week, for the time being it makes sense to let the Catapults bed in, but longer term perhaps their funding should be more contingent on business engagement (particularly SME engagement) as this will ensure the focus on delivering applied research can be maintained.