The IPL newsletter: Volume 21, Issue 429

$1 Billion Awarded for 12 Quantum Information Services and Artificial Intelligence Research Institutes

Connor LaVelle, SSTI
The White House Office of Science and Technology Policy, the Department of Energy (DOE) and the National Science Foundation recently announced over $1 billion in funding for the creation of 12 new quantum information services (QIS) and artificial intelligence (AI) research institutes across the country over the course of the next five years. The White House intends for this investment to “spur cutting edge innovation, support regional economic growth, and advance American leadership in these critical industries of the future.”

Relatedness, Complexity and Local Growth

Benjamin Davies & David C. Maré, Regional Studies

This article derives a measure of the relatedness between economic activities based on weighted correlations of local employment shares. This approach recognizes variation in the extent of local specialization and adjusts for differences in data quality between cities. The authors use this measure to estimate activity and city complexity, and examine the contribution of relatedness and complexity to urban employment growth in New Zealand. Relatedness and complexity are complementary in promoting employment growth in New Zealand’s largest cities, but do not contribute to employment growth in its smaller cities.

The effects of R&D Tax Incentives and Their Role in the Innovation Policy Mix – Findings from the OECD MicroBeRD Project, 2016-19

OECD Science, Technology & Industry Policy Papers
This report presents new evidence on the impact of R&D tax incentives and direct funding of business R&D, drawing on distributed cross-country and firm-level analyses undertaken as part of the first phase of the OECD microBeRD project (2016-19). The report focuses on R&D input additionality, i.e. the effectiveness of R&D support policies in encouraging additional business R&D investment compared to a counterfactual scenario in which no support is provided. While the main part of the analysis focuses on the impact of R&D tax incentives, the report also examines the role of corporate income taxation and direct funding of business R&D.

CONTEXT

In 2017, R&D tax incentives accounted for around 50% of total government support for business R&D in the OECD area, up from 30% in 2000. The proliferation of R&D tax incentives raises important policy questions about the effectiveness of different policy tools in stimulating R&D, the heterogeneity of effects across different types of firms and the interaction of different policies.  The microBeRD data set provides new insights into the effectiveness of R&D tax incentives in encouraging business R&D in the OECD area and the heterogeneity of effects both within and across OECD countries, including the underlying impact mechanisms. The report contributes to the debate on the role of R&D tax incentives in the policy mix by providing additional comparative evidence on the effects of alternative business R&D inducement incentives.

DATA

The data in this study comes from the OECD’s microBeRD project, which adopts a distributed approach towards the analysis of business R&D microdata, characterised by a collaboration between the OECD Secretariat and designated official national experts with access to the confidential R&D and public support microdata. This unique arrangement allows the implementation of a common and centrally-developed code which provides the basis for the harmonised analysis of cross-country, confidential microdata on business R&D and tax relief in 20 OECD countries.

FINDINGS

• General effect on R&D expenditures: The cross-country micro-aggregated impact analysis(accounting for the fact that not all R&D performing firms actually receive R&D tax relief) yields a gross incrementality ratio (IR) of around 1.4 (one extra unitof R&D tax support translates into 1.4extra units of R&D). The effect on experimental development is about twice as large as the effect on basic and applied research.Impact mechanisms: R&D tax incentives not only increase expenditures but also the level of human resources that firms report to dedicate to R&D. They do not appear to affect R&D unit labour costs, suggesting that the effects of tax incentives are not absorbed into higher wages. Furthermore, R&D tax incentives encourage additional business R&D both because existing R&D performers increase their R&D expenditure (intensive margin) and because additional firms start performing R&D (extensive margin).
• Heterogeneity of business response: The input additionality of R&D tax incentives is larger forsmall (IR: 1.5) and medium-sized (IR: 1.0) firms vis-à-vis large companies (IR: 0.4).This is a reflection of the fact that smaller firms perform, on average, less R&D than larger firms, rather than of economic size as such.In a similar vein, little input additionality (IR: 0.3) is found for firms in highlyR&D-intensive industries (Pharmaceuticals, Computer manufacturing, Scientific R&D).
• Policy mix: The exploratory analysis indicates a similar degree of input additionality for direct R&D government funding measures (IR: 1.4) compared to tax incentives and hints at the potential complementarity of direct and indirect support measures. Direct support measures appear more conducive towards promoting research whereas tax support is principally associated with heightened levels of experimental development. Additionally, a lower level of corporate income taxation is also associated with more R&D investment, although with a lower incrementality ratio than the more targeted R&D support policy measures. One unit of foregone tax revenue corresponds to a 0.24unitincrease in business R&D expenditure.
• Country-specific effects: Firm-level estimates of the effect of tax incentives and direct funding are consistent with the average effects found in the micro-aggregated analysis, but they also highlight a substantial heterogeneity in input additionality across countries. This is in part related to differences in the uptake and distribution of indirect and direct support measures across different types of firms, underscoring a need for a systematic examination of the link between business innovation policy uptake, design and policy outcomes.