Implementing incentives to business R&D

1. Implementing incentives to business R&D Jorge Niosi Professor UQAM Canada Research Chair on the management of technology Niosi - Globelics 2015 Tampere

2. Convergence, divergence, catching up In neoclassical economics, economic convergence is taken for granted, if barriers to trade and FDI are dismantled (Sachs and Warner, 1996) Backward countries would easily recognize best technologies and best practices and would adopt them once they are confronted to them Also, in this perspective key institutions need to be implemented in order to support property rights This purely theoretical perspective has been criticised (Stiglitz, 2002) and is mostly current in economic departments. Niosi - Globelics 2015 Tampere

3. Convergence, divergence, catching up For economic historians (Landes, 1998; Maddison, 2007, Mokyr, 2002, Reinert, 2007) inter-country divergence is the rule. Landes noted that the ratios of GDP per capita between the richest European countries and poorest countries in Africa were 3 to 1 in 1700 and are now up to 100 to 1. Historians put forward different explanations including culture (Landes), trade policy (Reinert), the growth of knowledge and industrial revolution (Mokyr) and other factors Niosi - Globelics 2015 Tampere

4. Convergence, divergence, catching up Some sociologists like Peter Evans (1995) suggests that a professional state bureaucracy, partially isolated from conflicting private forces, and eager and able to provide collective goods to society is a key precondition for economic development. He maintains that South East Asian countries have been able to build such a professional public bureaucracy, as Britain (1840) and the United States (1880) had previously done. Evans finds that bureaucracies in countries like Brazil and India lack the capacity to play the role of arbitrator among conflicting interests. He puts these countries in-between powerful developmental states such as those in South East Asia and purely dependent ones. Niosi - Globelics 2015 Tampere

5. Convergence, divergence, catching up In neoclassical economics, catching up was defined as a trend towards a convergence in total labour productivity (GDP per hour of work) between the leading country and its followers. Other authors have tried to disentangle trends at an industrial level (Lee and Lim, 2001). Some of them found that the rise of US labour productivity since 1995 is mostly due to innovations in retail trade and finance (Freeman et al, 2011) This approach help us to understand why some countries fall behind (i.e. Argentina) and others catch up (Korea) Niosi - Globelics 2015 Tampere

6. Convergence, divergence, catching up The point of view adopted here is that of Nelson (1993, 2005): only institutions related with science, technology and innovation count. Neither democracy, nor property rights are important for development (e. g. Victorian England, Bismarck’s Germany, Imperial Japan, Communist China). Those countries built the key institutions including a professional government bureaucracy. National systems of innovation, as well as regional and sectoral ones are the key to development Niosi - Globelics 2015 Tampere

7. Innovation systems They are set of organisations (R&D active firms, research universities, government laboratories, and others) as well as STI policies. These policies may be distributed into horizontal and vertical, as well as those human capital supply and human capital demand If human capital is the key to the absorptive capacity of nations, the market for human capital has to be entirely framed by the government Niosi - Globelics 2015 Tampere

8. Human capital policies related to STI Niosi - Globelics 2015 Tampere

9. Horizontal and vertical policies Niosi - Globelics 2015 Tampere

10. Government versus business R&D Many developing countries have concentrated their (modest) efforts on the public sector: government laboratories, and public universities in the first place They have almost entirely neglected the incentives towards the private sector The reasons are many: either (from the left of the political spectrum) they consider that private sector R&D is not to be supported by the state, or (from the right wing) they think that markets know more than governments, and these do not need to interfere with the - almost perfect - market mechanism. Niosi - Globelics 2015 Tampere

11. STI policy and measurement: neglected The whole area of STI policy is an orphan subject, at least in North America Scientists care for science policy and government support for knowledge production, less so for business R&D Management science is only interested in the impact of business R&D on strategy, not on the design of STI policy as such Economics most often ignores the subject. Government statistical offices seldom collect key information on R&D executants or innovation Niosi - Globelics 2015 Tampere

12. Is there any best order in STI policy? OECD countries align dozens (and in federal countries like Canada, Germany or US, hundreds) of incentives for private firms to conduct R&D. Is there any best practice in the order and the organisation of these incentives? Yet all countries use various sets of incentives and apply them differently: several OECD countries do not have tax credits for R&D Also, different industrial structures require different types of incentives (i. e. importance of the natural resource base, country size, etc.) Niosi - Globelics 2015 Tampere

13. Is there any best order in STI policy? Israel started with horizontal policies (The 1969 Industrial R&D Fund, followed by the 1992 Magnet Program for pre-competitive R&D, and the 1993-7 Yozma Program for VC) followed by vertical programs (i.e. 2009 biotech fund) Canada started with both horizontal (1942 tax deductions for R&D, 1962 IRAP, 1977 tax credits for R&D) and vertical (choice of aeronautics, telecommunications and nuclear energy in the immediate post-war period, space in the 1950s, then biotechnology, IT and advanced materials in the early 1980s) The United States started mostly with vertical programs (health in the early 20th century, aeronautics between the wars, telecommunications during WWII, space in the 1950s) followed by horizontal programs (tax credits for R&D in 1981 and SBIR in 1982) Niosi - Globelics 2015 Tampere

14. Is there any best order in STI policy? • There are arguments in favour of starting with horizontal programs: • Large companies of all sectors can start or develop R&D activities fairly soon • Unexpected companies and sectors can take advantage of these incentives • It is politically safer to support innovation in all industries before “picking winning sectors” • Horizontal programs are more market friendly and easier to implement Niosi - Globelics 2015 Tampere

15. Is there any best order in STI policy? • But there are counter-arguments for horizontal policies, particular tax credits or tax deductions • Many small companies have no tax to pay, thus no tax credit or tax deduction will do; this is particularly true for high-tech start-ups • Other companies prefer keeping tax authorities far from their books (Spain) • Many SMEs do not know how to manage R&D projects, thus their R&D activities are not successful (Canada) • Companies prefer projects with high private return but often low social returns (Hall & van Reenen, 2000) • Slow response of private firms to a high-risk new activity Niosi - Globelics 2015 Tampere

16. Is there any best order in STI policy? • There are arguments in favour of vertical policies • Targeting important areas with high social returns (defence, environment, food, health, security…) • Examining R&D projects before disbursing public funds • Fast entry into new promising technical areas • But there counter-arguments • Possibility of corruption (R&D subsidies against political favours) • Possibility of bad choices of R&D projects by public officers Niosi - Globelics 2015 Tampere

17. Timeframes? Korea offered (horizontal) preferential financing and tax rebates for R&D since the 1960s, also with little response from private firms (Kim, 1997) Canada started offering tax deductions for R&D in 1942, with little success (Niosi, 2000) Similarly, the 1981 US tax credit aroused a slow response from industrial firms Conversely the year 2000 UK tax credit for R&D aroused a fast response, probably because other incentives had diffused the R&D activity before Niosi - Globelics 2015 Tampere

18. Timeframes? Korea Million won BERD executed by industry Niosi - Globelics 2015 Tampere

19. Timeframes? These and figures for other countries (Canada, China, Israel, Singapore, USA) show that it takes between 25 and 40 years before private sector R&D takes off, and thousands of companies have incorporated in-house R&D routines, organisations and personnel - if and only if - governments keep adding, assessing and fine-tuning R&D incentives For government and academic research to become internationally recognized similar timeframes are needed Niosi - Globelics 2015 Tampere

20. Emerging country experiences Industry-financed BERD as % of GDP Niosi - Globelics 2015 Tampere

21. Conclusion Economic development needs a decades long starting process during which the key institutions are designed and implemented What is really important is the multiplication of learning institutions (universities, public R&D laboratories, and STI innovation policies as well as industrial policies, nurturing learning activities in private firms). What rapid-growing Asian countries are doing is exactly this; what most African and Latin American countries are doing is the opposite. Niosi - Globelics 2015 Tampere

22. Bibliography Evans, P. (1995): Embedded Autonomy: states and industrial transformation,Princeton University Press. Landes, D. (1998): The Wealth and Poverty of Nations Maddison, A. (2007): The World Economy, Paris OECD. Mokyr, J. (2002): The Gifts of Athena, Nelson, R. R. (Ed.) (1993): National Innovation Systems, Oxford. Nelson, R. R. (2005): Technology, Institutions and Economic Growth, Boston, Harvard U.P. Niosi, J. (2010): Building National and Regional Innovation Systems, Elgar, UK. Reinert, E. (2007): How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor, London, Constable. Stiglitz, J. (2002): Globalization and its discontents, New York, Norton. Niosi - Globelics 2015 Tampere