How do governments direct support for innovation? Published by OECD (9/2024).
Governments strive to find the appropriate level and balance of financial support for innovation to address competing and pressing policy objectives. Choices on the design of instruments, beneficiaries and support conditions shape how support for innovation can be directed towards priorities. “Directionality” is however multifaceted and still not sufficiently well understood and managed.
• While calls for more directionality of innovation support are on the rise, OECD data show that when it comes to supporting business R&D, the majority of OECD and EU governments have increasingly relied on R&D tax incentives, supposedly neutral instruments. Only the global financial crisis and COVID-19 pandemic briefly halted their rising popularity. In 2021, R&D tax incentives accounted on average for close to 60% of total measured support for R&D in the OECD and EU areas.
• R&D tax incentives are effective in raising total R&D, especially among credit constrained small R&D performers. However, they are more effective at boosting investment towards incremental development than more transformational, higher spillover-potential knowledge. And while theoretically easier to administer, authorities must address potential fraud or misuse. Although tax incentives contribute to building and sustaining R&D capabilities, they are insufficient to direct innovation towards specific policy priority areas and address the global challenges today’s economies are facing.
• Major measurement gaps persist in key areas that are critical for innovation systems to contribute to key transitions – both in terms of monitoring support for innovation activities other than R&D as well as support provided through indirect mechanisms, reflecting the sensitive nature of financial support to business in today’s competitive landscape. There is however scope for working towards a more comprehensive understanding of the landscape of government support for business R&D and its impact to inform policy making in this area.
