Why are Tax Incentives Increasingly Used to Promote Private R&D?

Abstract

Although not new, tax incentives have known major changes over recent years and it is becoming an increasingly important instrument in the policy mix to stimulate private R&D in many countries around the world. The OECD reports three major trends: The implementation of R&D tax incentives schemes by a growing number of OECD and non-OECD countries; A steady substitution of direct funding schemes for tax incentives schemes to stimulate business R&D; The many changes to tax incentives schemes most countries have done to increase the levels of generosity and attractiveness. This paper attempts to explain the motives behind these trends in R&D policy to stimulate private R&D and takes a multi-level approach as the issue involves political, strategic and economic considerations. The reasons behind the growing preference for tax incentives go much beyond any possible advantage these policies might have over direct measures, and are also the consequence of a political change in the EU R&D policy after the Lisbon Strategy and the subsequent actions to stimulate R&D expenditures, a change in the economic rationale of public support of private R&D in face of the insufficiency of market failures to justify that public intervention in a new context characterised by a public determination to increase the amount of business R&D expenditures, and the growing competition between countries for international R&D investment.