R&D tax subsidies key to increasing private research investment, finds report

Brussels, 02 Dec 2004

The 2004 edition of the Commission's annual report on European Competitiveness has concluded that direct government funding of private research and development (R&D) as well as tax incentives for research both have a 'significant and positive impact on business R&D spending in OECD and EU countries.'

The special theme of the 2004 report concerns the impact of public policies on economic performance, including a section on the role of public sector research spending. Overall, the report notes a significant increase in private R&D spending in OECD and EU countries between 1981 and 2002, but says that this trend is more likely the result of a general shift towards more R&D intensive industries than thanks to public research policies or spending.

The report does underline the positive impact of public research expenditure, however, noting that: 'Expenditures on R&D performed by universities and public research organisations are significantly positively related to business enterprise sector expenditures on R&D, indicating that public sector R&D and private sector R&D are [complimentary].'

Additionally, research using data from OECD and EU countries shows that spending on research in the higher education sector significantly stimulates the growth of GDP per capita, and that increased public sector R&D spending as a percentage of GDP has a highly positive impact on the number of patent applications per capita.

The effectiveness of public support for innovation is also analysed through case studies of three countries: Germany, Finland and Austria. The studies confirm that the public sector has an important role to play in promoting innovation by providing financial support and promoting research cooperation. 'The largest impact is achieved when collaboration among firms and public funding are present simultaneously,' states the report.

The analysis also underlines the importance of public-private cooperation in stimulating innovation. However, it adds: 'It is precisely in this area that the EU tends to score low relative to the US, where public and higher education research institutions have developed a far more effective system of linkages with the world of innovation.'

These findings have implications for public policy, according to the report. First, given the positive impact of tax incentives on R&D spending, 'increasing the generosity of R&D subsidies may become instrumental in increasing business R&D to levels closer to those of other main world leaders in this area.'

Furthermore, policies should aim to improve public-private research collaboration and foster technology transfer. The report also identifies a need to improve the infrastructure for research commercialisation, such as technology transfer offices and risk capital provisions. Lastly, it states that 'governments should provide appropriate funding for R&D conducted by public institutions, in particular research and development in the higher education sector.'

The consequences of not implementing these policies are hinted at in an analysis of the growth of the Chinese economy and its implications for Europe. The report notes that while 'the challenge of China may not be entirely unfamiliar, the combination of low labour costs and rapidly developing high technical and research capacities is less familiar.' For the EU to remain competitive, therefore, it must exploit advantages other than labour costs, which requires stronger R&D efforts and increased innovation.

'Currently, institutional conditions for implementing innovations are better in the EU-15, and also in the new Member States, compared to China. Yet, the emergence of China will inevitably lead to a change in the international division of labour and the place of the EU in it,' the report concludes. To download a PDF version of the report (3.21 MB), please: click here

CORDIS RTD-NEWS / © European Communities
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