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JPW Innovation Associates Inc.JPW Innovation Associates Inc. 11
Searching for a Balanced System Searching for a Balanced System of Innovation Incentivesof Innovation Incentives
A presentation to:A presentation to:
The Sixth Annual Research Money Conference "Are The Sixth Annual Research Money Conference "Are Canada's Business R&D Incentives Working?"Canada's Business R&D Incentives Working?"
Ottawa, March 8, 2007Ottawa, March 8, 2007
An International PerspectiveAn International Perspective
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 22
ContentsContents Canada and the worldCanada and the world
• Comparisons of fiscal supportComparisons of fiscal support Policy IssuesPolicy Issues
• Incentive design Incentive design • Policy optionsPolicy options
ConclusionsConclusions• Future of tax incentivesFuture of tax incentives• What’s next for CanadaWhat’s next for Canada
JPW Innovation Associates Inc.; OECD 2JPW Innovation Associates Inc.; OECD 2006006
33
Canada relies heavily on fiscal support Canada relies heavily on fiscal support of R&D of R&D (% of GDP)(% of GDP)
0.00
0.05
0.10
0.15
0.20
0.25
UnitedStates(2001)
France(2002)
UnitedKingdom
(2004)
Norway(2004)
Austria(2002)
Australia(2004)
Netherlands(2005)
Canada(2004)
Japan(2003)
Direct government funding of BERD Costs of fiscal incentives
Canada and the World
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 44
… … but it does not translate into high but it does not translate into high business R&D intensitybusiness R&D intensity
Country R&D/GDP BERD/GDP Availability of R&D Tax Incentives/TrendPer
CentOECDRank*
Per Cent OECD Rank*
CanadaAustraliaFranceJapanU.K.USA…Austria
…SwedenFinland
OECD
1.961.642.163.131.882.68
…2.35
…3.953.51
2.26
1116103
136…9
…12
1.030.861.362.351.161.88
…1.42
…2.932.41
1.53
1618133146…11
…12
Volume tax credit Hybrid tax allowance Hybrid tax credit Volume tax credit Volume tax allowance Incremental tax credit …Hybrid tax allowance or refundable to all tax credit
…Not availableNot available
* Of all 30 member countries, 2005 or most recent available yearSource: OECD, Main Science and Technology Indicators, 2006 -1, Paris, Tables 2and 24.
Most improved
Canada and the World
JPW Innovation Associates Inc.; OECDJPW Innovation Associates Inc.; OECD 55
More countries employ tax incentivesMore countries employ tax incentives
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1999 2006
A strong uptake in R&D tax incentives in
recent 7 years - in Europe and Asia.
Canada and the World
Before-tax price of R&D
JPW Innovation Associates Inc., OECDJPW Innovation Associates Inc., OECD 66
Canada’s R&D tax subsidies are Canada’s R&D tax subsidies are internationally generousinternationally generous
Chart 1: Tax Subsidies for R&D: A Case of Small Firm, Canada and OECD, 2006
-0.1 0 0.1 0.2 0.3 0.4 0.5
Germany
Italy
NZ
Greece
Sw eden
Iceland
Sw itzerl
Finland
Poland
Ireland
US
Austria
Belgium
UK
Australia
Korea
Denmark
Japan
Hungary
France
Norw ay
Netherla
Czech
Portugal
Mexico
Spain
Canada
Tax subsidy per $1 of R&D
Chart 2: Tax Subsidies for R&D: A Case of Large Firm, Canada and OECD, 2006
-0.1 0 0.1 0.2 0.3 0.4 0.5
Germany
Italy
NZ
Greece
Sw eden
Iceland
Sw itzerl
Finland
Poland
Ireland
US
Netherla
Austria
Belgium
UK
Australia
Japan
Denmark
Hungary
Korea
France
Norw ay
Canada
Czech
Portugal
Mexico
Spain
Tax subsidy per $1 of R&D
Canada and the World
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 77
Provinces top up Canada’s generosityProvinces top up Canada’s generosity
Tax Subsidies for R&D, Large FirmsCanadian Provinces, 2006
0 0.1 0.2 0.3 0.4
PE
IA
OB
CQ
NS
NB
SK
NF
M
Tax subsidy per $1 of R&D
Canada and the World
Tax subsidies for R&D, Small Firms Canadian Provinces, 2006
0 0.1 0.2 0.3 0.4 0.5 0.6
PEI
AB
BC
SK
NS
NB
NF
ON
MB
QU
Tax subsidy per $1 of R&D
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 88
Tax incentives are going beyond R&DTax incentives are going beyond R&D
Incentives for enterprise formationIncentives for enterprise formation• Young innovative companies: FR, BEYoung innovative companies: FR, BE• Venture capital incentives: UK, IE, BCVenture capital incentives: UK, IE, BC
Technological Development Incentives: ES, PEITechnological Development Incentives: ES, PEI Technology Transfer (Patents): ON Technology Transfer (Patents): ON Training Incentives: JP, KO, AT, FR, QUE, ONTraining Incentives: JP, KO, AT, FR, QUE, ON Collaboration incentives: JP,DK, BE, HU, ES, Collaboration incentives: JP,DK, BE, HU, ES,
QUE, ON QUE, ON
Canada and the World
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Training incentives become significantTraining incentives become significant
00.05
0.10.15
0.20.25
0.30.35
0.40.45
QC ON AT FR JP KO ES
large
small
v. small
Canada and the World
Tax Subsidy
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1010
Collaboration incentives are gainingCollaboration incentives are gaining
00.050.1
0.150.2
0.250.3
0.350.4
0.450.5
QC ON DK ES JP BE
Large
Small
Tax Subsidy
Canada and the World
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1111
Trends in business supportTrends in business support
• Two thirds of OECD countries have R&D Two thirds of OECD countries have R&D tax incentives in place tax incentives in place
Canada Canada hashas a prominent placea prominent place
• Holistic innovation support emerging Holistic innovation support emerging Canada’s place Canada’s place notnot so prominent so prominent
• Where federal Canada is missing the boat Where federal Canada is missing the boat – provinces are picking the slack, e.g. in – provinces are picking the slack, e.g. in incentives for training and collaborationincentives for training and collaboration
Canada and the World
Where is the direct public support?
EU/CREST Working GroupEU/CREST Working Group
Rationale Choice of
tools1st order effects
2nd order effects
3rd order effects
High socialreturn ...
Firms underinvest in R&D
Directmeasuresor fiscalincentives
Benefits at macro level: TFP, growth, quality of life
IncreasedR&D at firm level
Increasedprofits at firmlevel
Logic of state interventionLogic of state intervention
Source: EU/CREST Working Group
Policy Mix Issues
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1313
Basic forms of supportBasic forms of support
Grants &subsidies
Taxincentives
More targeted Pre-set budget
More neutral
More accessible
Less costly to administer ?
Source: EU/CREST
Long term? Short term?
More costly to
administer ?
Policy Mix Issues
JPW Innovation Associates Inc.; EuropeaJPW Innovation Associates Inc.; European Commission, 2007n Commission, 2007
1414
Direct vs. tax support in EU-17Direct vs. tax support in EU-17
0
2
4
6
8
10
Number of
countries
Strong direct,unfavouarble tax
Little direct,unfavourable tax
Little direct,favourable tax
Strong direct,favourable tax
1991
2000
2006
A Significant Shift to Fiscal Incentives
Policy Mix Issues
Finland, SwedenGermany
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1515
Policy design depends Policy design depends on national goalson national goals
Goal: Increase risky Goal: Increase risky research/ inventionsresearch/ inventions
Narrower R&D definitionNarrower R&D definition Narrower expenditure Narrower expenditure
base (less D)base (less D) De-linking from current De-linking from current
profits (refund, wages) profits (refund, wages) Collaborative R&DCollaborative R&D
Policy ToolsPolicy Tools: Grants and : Grants and subsidies; incremental subsidies; incremental tax creditstax credits
Goal: Increase general Goal: Increase general uptake of new knowledge uptake of new knowledge and innovationand innovation
Broader R&D definition Broader R&D definition (e.g. new to the firm) may (e.g. new to the firm) may include innovationinclude innovation
Broader expenditure baseBroader expenditure base
Policy ToolsPolicy Tools: Tax credits : Tax credits based on volume of R&D, based on volume of R&D, incentives for innovation, incentives for innovation, networks, regulations, networks, regulations, new facilitating new facilitating institutionsinstitutions
Source: Jan Nill, EU/IPTS
Policy Mix Issues
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1616
Policy objective and incentive designPolicy objective and incentive design
Explore Explore novel and generic research directionsnovel and generic research directions (limited appropriation of returns)(limited appropriation of returns)• Grants and subsidies,Grants and subsidies, r refundable incrementalefundable incremental tax tax
credit,credit, research wages tax credit research wages tax credit PromotePromote linkages between linkages between elements of the elements of the
science and innovation systemscience and innovation system• Non-incremental tax schemes, collaboration Non-incremental tax schemes, collaboration
incentives, grants and subsidiesincentives, grants and subsidies Encourage Encourage uptake of new knowledge by uptake of new knowledge by
businessbusiness• Broadest inclusion of R&D costs, a volume-based R&D Broadest inclusion of R&D costs, a volume-based R&D
tax credit, possibly including some innovation coststax credit, possibly including some innovation costs
Source: Jan Nill, EU/IPTS
Policy Mix Issues
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1717
What the future holdsWhat the future holds
Pressures to address business innovation will Pressures to address business innovation will continue to influence policy mixcontinue to influence policy mix• ““Direct support to business innovation … remains Direct support to business innovation … remains
important”important” (OECD) (OECD)• Focus on innovation linkages (networks, partnerships)Focus on innovation linkages (networks, partnerships)
Tax credits will survive … but may not be as Tax credits will survive … but may not be as generous as they are nowgenerous as they are now• Countries streamlining: ES, JP, AUCountries streamlining: ES, JP, AU• Countries evaluating: UK, NO, NL, AT Countries evaluating: UK, NO, NL, AT
Conclusions
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1818
Do R&D tax incentives work in Do R&D tax incentives work in Canada?Canada?
Evidence supportive but dated Evidence supportive but dated New evaluation requiredNew evaluation required
• Include direct support contextInclude direct support context Look at overall business tax regimeLook at overall business tax regime
• How do tax incentives interplay with business How do tax incentives interplay with business taxation?taxation?
• How generous should R&D tax incentives be?How generous should R&D tax incentives be?
Conclusions
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 1919
What’s next for Canada?What’s next for Canada?
Adapt to current business needs:Adapt to current business needs:• Expand SR&ED thresholdsExpand SR&ED thresholds• Make SR&ED refundable to non-CCPCs, etcMake SR&ED refundable to non-CCPCs, etc
Rethink the balance: fiscal – directRethink the balance: fiscal – direct• Design new mix of incentivesDesign new mix of incentives• Reward merit and competitiveness of projectsReward merit and competitiveness of projects• Work with provinces Work with provinces • New facilitating institutions required?New facilitating institutions required?
Conclusions
A better solution?
A quick fix solution?
JPW Innovation Associates Inc.JPW Innovation Associates Inc. 2020
““The art of explaining tax expenditures The art of explaining tax expenditures lies in knowing where to stop.”lies in knowing where to stop.”
Roger HeathRoger Heath
Thank youThank you
I welcome your questionsI welcome your questions
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