Innovation

Support for innovation, including tax credits and grants, loans and subsidies, can have an impact on activity, but effects are not always positive.

Summary

This page offers an overview of why we are interested in innovation as a means of encouraging local economic growth and offers insight on what does and doesn’t work in this policy area.

It summarises some of the evidence we already have on what works when delivering these types of programmes, and offers some thoughts on improving evaluation as well as some case study examples. Throughout the page you’ll find links to further resources including a more detailed discussion of why we look at innovation, our full evidence review, as well as evaluation resources.

What do we mean by innovation and how can it deliver local economic growth?

Innovation involves the invention, diffusion and exploitation of new ideas. In our work so far the What Works Centre has been particularly interested in innovation programmes where governments support private sector research and development (R&D) with the aim of generating or commercialising new ideas, products or processes.

Innovation is an important influence on long term economic growth for many reasons:

  • It can cut costs and help firms to develop smarter ways of working, lead to higher productivity, and increased profits
  • It can help firms develop new products

Governments support R&D because there are ‘spillover’ effects from innovation meaning that the gains to society can far outweigh the benefits to individual innovators. Because of these spillovers, and because the returns to innovation are highly uncertain, individual firms are likely to underinvest in innovation.

Governments can support innovation by doing their own research, or can provide direct and indirect support to R&D in many different ways, including:

  • Providing direct R&D funding via grants, loans and subsidies.
  • Encouraging collaboration and networking.
  • Funding universities.
  • Providing firms with tax credits and other fiscal incentives.

Innovation is not a linear process, and the path from R&D to innovation to improved productivity and increased employment is not predictable, so evaluating and understanding the direct cause of R&D expenditure on innovative activity and local economic growth is difficult.

Find out more about what we mean by innovation and why we look at it.

What does the evidence on innovation show?

We looked at two sets of innovation programmes – grants, loans and subsidies, and tax credits.

Grants, loans and subsidies

R&D grants, loans and subsidies can positively impact R&D expenditure, although effects are not always positive. They can also lead to additional innovation for recipients, although again effects are not always positive. The effects differ across types of innovation, and are weaker for patents than for (self-reported) measures of process or product innovation.

R&D grants, loans and subsidies can positively impact productivity, employment or firm performance (profit, sales or turnover). There is some evidence that support is more likely to increase employment than productivity.

R&D grants, loans and subsidies are more likely to improve outcomes for small to medium-size companies than for larger ones. In part this may be because for larger firms, public support makes up a relatively small amount of overall R&D spend, so positive effects are harder to detect.

Tax credits

R&D tax credits can positively impact R&D expenditure, although effects are not always positive.

As with grants, loans and subsidies, impacts may depend on firm size, with small firms slightly more likely to experience positive benefits. Smaller firms may face greater financial constraints, making them more responsive to changes in tax credits.

You can find more detail on the different impacts of R&D intervention, including on collaboration, and comparisons of the two types of intervention, in our full review.

Read the full evidence review.

What policymakers need to know when designing innovation programmes

The evidence urges caution on the role that more localised innovation policy could play in driving local economic growth – we know very little about whether or how increased R&D activity feeds through to greater innovation, better firm performance or longer term economic growth, particularly at the local level.

Local R&D support programmes could also result in inefficiently high levels of support if footloose firms are able to extract more generous support from competing local areas regardless of any net beneficial impact.

There is also little evidence on key aspects of programme design, such as eligibility criteria or targeting firms by size.

The long-term impact, and cost-effectiveness of different kinds of support is also unknown.

Further, quality evaluations are needed in this area to test key outcomes of innovation programmes, particularly on wider local economic growth.

What policymakers and academics need to know when evaluating innovation programmes

We need to improve our understanding of the value for money, and long-term effects of investment in R&D. Future evaluations should help us to understand what the wider local growth and long term benefits of innovation programmes are. You can read more about how to evaluate here.

To help practitioners evaluation innovation programmes, we have pulled out some examples of good practice:

UK ‘Creative Credits’ programme This study evaluates the UK ‘Creative Credits’ programme, a pilot which provided small and medium-size businesses (SMEs) with vouchers to spend on creative services such as website design or advertising. Read more.

Danish Innovation Consortia This study looks at the impact on firm performance of collaboration with public research centres. Read more.

You can learn more about how we rank evaluations using the Scientific Maryland Scale.

Evidence Review Downloads

Related Content

Register for WWG Updates