But among the countries for which the OECD obtained data, France recorded a relatively poor return on its R&D tax breaks, earning 34 cents of additional corporate R&D spending for every euro offered in tax breaks.
The reasons are complex, but could offer policymakers many suggestions on how to design R&D policies to achieve the best effect. “We need to become smarter than ever in using the scientific evidence at our disposal to guide our policy choices,” said Patrick Child, Deputy Director General for Research and Innovation at the European Commission, who co-funded the study.
In the developed world, governments encourage small and large companies to spend more on R&D, for the benefit of the economy as a whole. Currently, among OECD member countries, about 55 percent of their total government support for business R&D comes in the form of tax breaks, the rest in the form of “direct” subsidies such as grants or loans. .
The OECD study provides several clues as to how these tax incentives work. According to his analysis, tax breaks are the most effective in incentivizing small and medium-sized businesses, or those that do not already do much research, to spend more on R&D. On average, according to the study in 20 countries, tax incentives for SMEs get € 1.4 of additional R&D activity from industry for every euro offered in lower taxes – well above the economy-wide average of one incoming euro for one outgoing euro.
In contrast, tax breaks are less effective for large companies or those that already do a lot of R&D. Thus, France’s weakness might reflect the nature of French industry, with R&D already concentrated among large companies or established companies.
Economists have found that other factors that matter include whether a government sets a limit on the amount of tax relief allowed; setting a cap on the size of a possible benefit actually seems to encourage more spending – perhaps because it means that small businesses that are below the cap get more of the available break.
In addition, tax incentives are more effective in inducing companies to invest in near-market experimental development projects rather than early-stage basic or applied research. In contrast, direct grants like grants are more effective in encouraging early stage research.