An OECD study quantified the effects of government funding on business R&D across 17 OECD nations over the last few decades. It describes the historical effectiveness of policy instruments such as tax incentives and direct public funding, and provides several recommendations for more effective R&D policy design.
Key ideas from the paper are summarised as follows:
Market failure in R&D: Imperfect approbility or knowledge
diffusion suggests that the private rate of return from R&D can often be
less than the social return. High risk in research can make access to funding
difficult and discourage firm participation in R&D. These factors combined
suggest that private R&D levels might be below socially preferred levels.
Incentives and instruments: Governments have incentive to
complement private R&D, reduce costs and uncertainty of R&D, and pursue
technological opportunities. Governments invest in research and development (R&D)
to address public needs and resolve market failures in private R&D. Three
methods include public performed research (e.g. university), public funding of
private R&D, and fiscal incentives.
Intervention risks: However, government funding might crowd out
or displace private spending as a substitute or by increasing its demand and
price. Public funding might also deter private investment, where grants and
awards can create perceived exclusion. Public funding might also allocate
capital less efficiently than market forces and generate undesired
distortions.
Empirical findings: Government funding and tax incentives
usually have a positive, significant and lagged effects on private R&D
level. The effects of tax breaks are usually more rapid as business respond
immediately to changes in taxes. Government performed research has a negative
impact on private R&D, suggesting the effects of crowding-out and
displacement. University research appears to have no impact on private R&D,
suggesting challenges in knowledge transfers. The positive effects on government
funding increases up to a threshold and decreases beyond that.
Policy implications: Public funding is a substitute to fiscal incentives. A long term integrated R&D policy & framework is needed to maximise effectiveness. Stable policy has more positive effects than volatile policies on sustained private R&D levels.This reflects the long term commitments and cost of R&D, and its sensitivity to uncertainty. Countries that provide too little or too much funding will worsen policy effectiveness. Design and effects of policies are not fully reflected in data (e.g. difficult to track lagged effects). This can hide benefits and costs.
References
Guellec, D. and B. van Pottelsberghe de la Potterie (2000), “The Impact of Public R&D Expenditure on Business R&D”, OECD Science, Technology and Industry Working Papers, No. 2000/04, OECD Publishing, Paris, https://doi.org/10.1787/670385851815.