Policies to foster R&D and innovation in OECD countries

1. Policies to foster R&D and innovation in OECD countries  Mario Cervantes Senior Economist OECD Science & Technology Policy Division Seminar on How R&D Tax Incentives Can Boost the Competitiveness of European High Tech Industry 28 February 2007 Näringslivets Hus, Stockholm

2. OECD work on science and innovation • OECD work on science and innovation is carried out in the Committee for Scientific and Technological Policy, made up of delegates from member countries. • The priorities are established by countries in a 2-yearly work programme. • The output of the work includes: • Analytical reports, e.g. on Public-Private Partnerships or Science-Industry Links. • Policy reports, e.g. country reviews of innovation policy. • Policy guidelines, e.g. on licensing of genetic inventions. • Statistics, indicators and benchmarking reports, e.g. OECD’s bi-annual Science, Technology and Industry Scoreboard. • In practice, a platform for exchange, analysis and discussion on good policy practices.

3. Today’s Outline • I. The Big Picture: general trends in R&D and innovation • II. Trends in R&D and innovation policies in OECD countries • III. The role of tax incentives to promote R&D and innovation • IV. Conclusions

4. Trends in R&D spending across OECD Gross domestic expenditure on R&D by area, 1991-2004 Billions of USD PPP Trends in R&D intensity by area, 1991-2004 Source: OECD Science, Technology and Industry Outlook 2006

5. Recent trends – Growing R&D intensity in several OECD countries (R&D as % of GDP) Gross expenditure on R&D as a percentage of GDP, 1995, 2000 and 2004 Source: OECD Science, Technology and Industry Outlook 2006

6. Increasing capability of non-OECD membersR&D intensity in non-member countriesAs a % of GDP

7. But R&D spending still falls short of national targets in most OECD countries (current R&D spending and official targets, as % of GDP, in %)

8. Patterns of business R&D performance varied Business R&D spending in major OECD regions, 1991-2004 and as a % of GDP Source: OECD Science, Technology and Industry Outlook 2006

9. Raising R&D intensity primarily involves greater investment in business R&D BERD intensity by country, 1995, 2000 and 2004As a % of GDP Source: OECD Science, Technology and Industry Outlook 2006, forthcoming

10. But business R&D is influenced by structural factors, such as firm size … Source: OECD R&D Database

11. .. industry composition … (R&D in the business sector adjusted for variations in industry structure) Source: OECD, Going for Growth, based on ANBERD Database

12. .. and the contribution of foreign affiliates(R&D expenditure of foreign affiliates as % of total business R&D) R&D expenditure of foreign affiliates, 1995, 2000 and 2003As a % of R&D expenditures of enterprises Source: OECD Science, Technology and Industry Outlook 2006

13. What policies to foster business innovation? • Providing good framework conditions for business: • Good infrastructure, highly skilled workforce, tax climate, etc. • Improving quality of education and teaching to attract and retain talent • Intellectual property rights – to provide incentives for investment • Through support measures: • R&D tax credits • Direct support (grants, loans, etc.) • Public-private partnerships • Initiatives at the local and regional level. • OECD countries use a mix of these instruments

14. Framework conditions are important determinants of business R&D … • OECD analysis shows that: • Reducing anti-competitive product market regulations stimulates business R&D, as it strengthens the incentives to innovate. • A low level of restrictions on foreign direct investment can improve cross-border knowledge transfers. • Stable macroeconomic conditions and low real interest rates help to encourage the growth of innovation activity. • The availability of internal and external finance is an important determinant of innovation expenditures. • Improved corporate profitability and higher stock market capitalisation both have a positive effect on innovation expenditures.

15. … as are innovation policies • OECD analysis shows that: • Policies that help to make foreign knowledge more accessible can be very effective in fostering business R&D. • Expanding public research can support business sector research, but expanding both will require efforts to raise the supply of human resources. • Fiscal incentives can be effective, especially when firms face financial constraints. Tax relief for private R&D is found to provide a stronger stimulus to business R&D than direct government subsidies. • The case for further strengthening of intellectual property rights for patent holders in OECD countries appears weak. Excessively strong intellectual property rights can be counterproductive as it may reduce product market competition.

16. Trends in OECD countries in the use of support measures for business R&D and Innovation • Some streamlining of support programmes: • Efforts to reduce the range of programmes • Growing focus on competitive-based and merit based competitive funding • Growing focus on innovation instead of R&D, greater attention for services • Growing focus on supporting networks and clusters, instead of individual firms • Improving IPR management for business innovation • R&D tax credits in search of more efficiency: • New R&D tax credits for labour charges in some countries (Belgium, Spain, Netherlands) • Leverage procurement policies, including via SMEs to foster innovation and develop lead markets, in particular in Europe • Overall: in search of “smarter ways” to support innovation

17. FINANCING INNOVATION • Early stage funding (seed capital schemes) ; matching capital schemes versus loan capital • Focus on growth companies • Assist academic researchers in firm creation • REGIONAL INNOVATION CLUSTERS • Shift away from helping under-developed regions to supporting new growth (e.g. Netherlands) • Improved planning and selection of clusters focusing on maximising existing synergies (e.g France) • Central role of universities in cluster development • High level and consistent political support from regional governments

18. ENHANCING COLLABORATION AND NETWORKING • Attracting more attention and more funding • Focus on building longer-term interactions, not one-off efforts • Industry-oriented networks (firm to firm) • Public/Private partnerships: competence centres linking governments , PROs and firms, including SMEs

19. GLOBALISATION OF RESEARCH AND INNOVATION • Generic framework policies for attracting FDI related R&D • Investment agencies • Linking national firms to multinational supply chains ; role of public/private partnerships • Globalisation of public research institutions • EVALUATION OF RESEARCH AND INNOVATION POLICIES/PROGRAMEMS • Economic efficiency remains important goal • Balancing ex-ante and ex-post evaluations • Holistic approach emerging: include social and environmental effects

22. Direct government funding of business R&D and tax incentives for R&DAs a % of GDP

23. Types of Tax Incentives in OECD countries • 1) Tax Credits • 2) R&D Allowances • 3) Depreciation allowances – accelerated depreciation • 4) Reduction in social security (withholding tax) for employees in R&D related activities • 5) Tax incentives on collaborative R&D activities • However, other tax incentives exist to correct market failures in financing for innovation • Capital gains exemptions on exit from early stage investments • VAT exemptions for management of funds • Special Company tax rates for SMEs • Tax incentives for private individual investments in equity and venture capital • Tax exemptions on royalties from patents

24. Recent changes to R&D tax incentive schemes in some OECD countries • Combine requirments on level of R&D spending as well as incremental R&D spending (e.g France) • Allow subcontractors to qualify for R&D tax credit (e.g. Austria) • Extend R&D tax credits to labour charges on highly qualified workers, including Phds (e.g. Belgium, France, Netherlands, Spain). • Broaden coverage to SMEs (e.g. Canada allows individual investors not acting as a group to each claim full tax credit) • Improve adminstration of tax credits (e.g. UK proposal to create specialised R&D unit in the HM Revenue and Customs, improve use by SMEs)

25. In short a gradual shift in role of fiscal incentives to support not just R&D but “innovation” and investments in other intellectual assets • A search for efficiency of tax system and fiscal incentives for R&D tax credits

26. IV. Conclusions • Overall prospects for science, technology and industry are positive – but contingent on global economic environment. • Recent divergence of regional patterns of R&D and innovation could converge if economic environment remains stable. • Patterns of innovation are changing in significant ways: rise of university research, growth of services, globalisation, open innovation.

27. IV. Conclusions (con´t) • Continued attention on improving efficiency of innovation systems • Sustaining institutional reforms to improve policy coherence • Promoting innovation in services • Promoting R&D and innovation in SMEs increases in importance • Fiscal incentives for R&D play critical role • Evaluation also important, but policy makers are taking a more holistic approach recognizing social not just economic impacts

28. Challenges for policies • Anticipating and responding to future social and innovation needs: policy makers lack mechanisms for identifying future needs and linking them to decision and innovation strategies • Human resources issues remain a concern across OECD but concerns differ (e.g. competence/Skill gaps versus shortages and declining numbers of S&T grads) • Adjusting innovation support measures to emergence of Open Innovation business models • Responding to globalisation remains a challenge

29. Thank you! • Mario Cervantes • Email: • mario.cervantes@oecd.org • www.oecd.org/sti/innovation • www.oecd.org/sti/scoreboard