- Publication date
- 18 May 2023
- Directorate-General for Research and Innovation
Tax incentives are a commonly used policy tool by governments worldwide to encourage firms to invest in research and innovation (R&I) activities. These incentives come in various forms, including tax credits, grants, and deductions, and their effectiveness in promoting R&I has been widely debated in the literature.
Understanding the impact of tax incentives on innovation is of great importance to policymakers and businesses alike, as innovation is widely recognized as a key driver of economic growth and competitiveness.
Supporters of tax incentives argue that they can provide a powerful stimulus for R&D investment by reducing the cost of R&I activities for innovative firms. This can lead to more investment in R&D, which can ultimately lead to the development of new products, services and technologies, and improved competitiveness in the marketplace. Additionally, tax incentives can help firms to attract and retain highly skilled workers, which can enhance their innovation capacity.
However, not everyone is convinced of the effectiveness of tax incentives. Some critics argue that tax incentives are quite untargeted, not allowing for a directional approach, may not provide enough incentive for firms to invest in R&D, as the cost savings may not be significant enough to offset the risks and uncertainty associated with innovative activities. Additionally, some critics argue that tax incentives can lead to "crowding out" of private investment in R&D, as firms may choose to rely on government support rather than investing their own resources.
Overall, the debate surrounding the effectiveness of tax incentives for innovation is complex, and there are valid arguments on both sides. This literature review looks into recent papers that evaluated the impact of R&I tax incentives on a wide set of firm level outcomes.
Contributors: Valentina Di Girolamo, Luca Bollinger, Alessio Mitra (review coordinator), Elena-Raluca Pancu, Océane Peiffer-Smadja, Julien Ravet (team leader), Jan-Tjibbe Steeman.