Why Do Governments Support Business R&d?

Governments can choose among various tools to leverage business research and development (R&D). They can offer direct support via grants or procurement or they can use fiscal incentives, such as R&D tax incentives. More countries are now using tax incentives than a decade ago and the schemes are more generous than ever. As of today more than 20 OECD governments provide fiscal incentives to sustain business R&D, up from 12 in 1995 and 18 in 2004. Of the countries that do not have R&D tax incentives, Germany and Finland are currently discussing their introduction. This note sets out key considerations for the rationale, design and evaluation of such measures. • R&D is seen as a crucial investment for the long-run growth of economies. Increases in multifactor productivity in OECD countries have been a major determinant of economic growth. These are linked strongly to increases in public and private R&D. R&D intensity of countries and their growth performance is correlated with the share of research financed by the business sector. • Maintaining jobs, especially in times of crisis. Governments can make the difference between business success and business failure. For example, to help firms facing the financial crisis, some countries have provided more generous but temporary R&D fiscal incentives such as enlarging the eligible base for the credit (e.g. in Japan and the Netherlands), allowing a longer carry-forward of unused credits to the following years (Japan), or shortening the time for credit refunds (France). • Contribute to national competitiveness. In a world where multinational enterprises are increasingly internationalising their R&D activities governments also compete in attracting R&D activities of these corporations. Generous incentives through R&D tax incentives can make a country a relatively more attractive location for R&D investments than its competitors. • R&D investment is risky. Few R&D projects are likely to end-up as a marketable new products or processes, and often only after long and uncertain payback periods. Moreover, it is very difficult for financial institutions to judge the quality of the R&D investment because of its uncertain outcome and firms' reluctance to disclose all of the relevant information. As a result, firms, and particularly small firms and start-ups, will be more likely to be credit constrained when investing in R&D. • R&D activity generates " public " goods. Knowledge spills over to other firms and organisations which did not bear the costs of this investment. Since investing firms …