Innovation

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

Summary

The review considered around 1,700 studies from the UK and other OECD countries, covering all aspects of support for innovation. We have produced two reports summarising the evidence on local innovation policy – one on programmes offering R&D grants, loans and subsidies; and one on programmes offering R&D tax credits.

For R&D grants, loans and subsidies, the 42 evaluations that met the Centre's minimum standards looked at one or more of three broad outcomes of interest: R&D expenditure, innovation and economic outcomes. For any one of these broad outcomes, around half of the evaluations that looked at that outcome found positive effects. Seven out of 16 find positive effects on economic outcomes (productivity, employment or firm performance – profits, sales or turnover).

For R&D tax credits, the 21 evaluations that met the Centre's minimum standards looked at one or more of three broad outcomes of interest: R&D expenditure, innovation and economic outcomes. Of these, 10 of 17 found positive programme impacts on R&D expenditure. Only 1 of the 3 studies looking at economic outcomes (productivity, employment of firm performance – profits, sales or turnover) found consistently positive effects.

What the Evidence Showed

Grants, loans and subsidies

  • R&D grants, loans and subsidies can positively impact R&D expenditure, although effects are not always positive.
  • R&D grants, loans and subsidies can raise innovative activity in 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. Smaller firms may also be more likely to formalise processes in anticipation of, or response to, a grant, so that some innovation-related spend is reclassified as R&D.
  • Programmes that emphasise collaboration perform better than those that just support private firms (as well as those where the programme focus is unclear). Encouraging collaboration might have an additional positive effect on the likelihood that an R&D support programme generates positive effects on outcomes of interest.
  • Programmes that target particular production sectors appear to do slightly worse in terms of increasing R&D expenditure and innovation, compared to those that are ‘sector neutral’.

R&D Tax credits

  • R&D tax credits can positively impact R&D expenditure, although effects are not always positive.
  • 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. However, as with R&D grants, loans and subsidies, smaller firms may also reclassify informal innovation-related spending as ‘formal’ R&D.
  • We only have three studies that compare the impact of R&D grants / loans / subsidies with that of tax credits. The limited evidence from these is supportive of featuring both approaches in the policy mix.

Where the evidence was inconclusive

Grants, loans and subsidies

  • Evidence on the extent to which public support crowds out private investment is mixed.

R&D Tax credits

  • It is hard to reach any strong conclusions on differences between the different programme types in terms of effectiveness.

Where there was lack of evidence

Grants, loans and subsidies

  • There is little impact evaluation evidence on key aspects of programme design, such as eligibility criteria and targeting programmes by firm size.
  • Relatively few evaluations consider the timing of effects. In particular, there is a lack of studies considering long-term impacts of interventions (ten years plus). However, the small number of studies that are able to consider the time profile of effects, do not suggest that programme effects get stronger over time.
  • Relatively few evaluations consider more than one element of the ‘chain’ from increased R&D spend, through innovation, to improved firm performance. Results from these studies are mixed.
  • Programme spend and operational cost data is rarely available to evaluators. This makes it very hard to assess the cost-effectiveness of public R&D grants and subsidy interventions.

R&D Tax credits

  • Most shortlisted studies focus only on R&D effects of tax credits, and there is surprisingly little evidence on the impact of R&D tax credits on innovation (as measured by patents or self-reported innovative activity, for example). The studies we do have, suggest that tax credits can have a positive impact on innovation, both at firm and area level.
  • There is surprisingly little evidence on the effect of R&D tax credits on wider economic outcomes (such as firm productivity, employment or profit) and it is hard to draw firm conclusions on impact for these outcomes.
  • Relatively few evaluations consider more than one element of the chain from increased R&D spend, through innovation, to improved firm performance. Results from these studies are generally positive.
    None of the shortlisted evaluations consider the timing of effects.

Lessons

  • 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.

  • Many broader economic benefits are likely to ‘spill over’ beyond the immediate area in which the policy is implemented. This might still result in a net benefit for the place implementing the policy, but such spillovers reduce the economic benefits to individual areas and strengthen the case for national policy.

  • 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.

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