Productivity and Innovation

Tax incentives have become the number one policy tool that governments use to encourage companies to invest in research and development. This column presents the results of a new analysis of firm-level records in 20 OECD countries, which suggests that, overall, R&D tax incentives are effective in boosting business R&D but their effectiveness differs sharply across firms of different sizes and across countries. Tax incentives are also better suited for supporting R&D projects closer to the market while direct government funding – such as through grants and R&D procurement – is more conducive to research that may not immediately result in new goods or services.

For economies to innovate and grow past the COVID-19 crisis, policymakers have to understand the implications of various policies for innovation and economic growth, and take into account how people sort into professions and how potential scientists and innovators respond to policy. This column presents a comprehensive framework to study theoretically and empirically the role of education and R&D policies for boosting innovation and economic growth. It finds that policy tools in both education and R&D are complementary in developing talent, which is the key ingredient to innovation. The best mix of policies depends on how unequal society is and how urgently innovation is needed.