LECTURE 9
What is the goal of R&D policy?
Compensate for the market failures that affect innovation to increase the incentives to invest in innovation
What are the criteria for a good R&D policy?
1. ADDITIONALITY -> It solves the ex-ante problem
The policy leads to R&D that would not have existed in its absence
Empirically difficult to evaluate -> counterfactual question
2. NET BENEFIT IN WELFARE -> it solves the ex-post problem
The policy must be cost-effective -> its benefits must surpass its cost both financialy and socialy
What are the main mechanisms through which R&D policies affect innovation?
Reducing costs: tax credits, LM policies or direct subsidies
Increasing expected revenues: changing anti-trust policies, giving market power
What is the functioning of tax credits for incentivizing R&D?
It consists of giving fiscal benefits to firms who conduct R&D.
It increases R&D investment by shifting down the marginal cost of capital curve
Are tax credits an efficient policy tool?
Sllthough we have to take into account firms rewritting costs as R&D and reallocation to R&D into places with fiscal benefits, empirical evidence has shown that there is an increase in R&D overall
What is the functioning of patent boxes?
Consists on applying a lower tax rates to revenues that come from patents
Are patent boxes effective?
No, because unlike R&D tax credits, they do not target imputs. They are a form of harmful tax competition and they can encourage extending the life of patents that otherwise would not have n¡been renewed
What is the functioning of R&D subsidies?
They finance part or the tottality of a project.
In practice, the organisating institution publighes a call for R&D projects, in which describes the characteristics of the desired projects, then firms apply for the subsidy and the institution evaluates the projects, selects a candidate and finances.
R&D reduce the marginal cost of capital and can make firms less financialy constrainted.
Are R&D subsidies effective?
They are the most effective tool, but not necessarily the most efficient.
Inefficiencies can arise due to the cost of the program, the selection method (information issues) or misappropiation.
Empirical evidence shows that effectiveness depends on the design of the specific program, in flanders they have shown that they can be an effective tool that does not fully crowd out R&D and that compensate for its costs
Which LM policies exist to encourage R&D? Are they effective?
Non-compete policies: they decrease employee mobility but can increase the investment in human capital
Place-based policies: they do not increase R&D, just shift the location of resources