jpw innovation associates inc. 1 searching for a balanced system of innovation incentives a...

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


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


… … 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


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.


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




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 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 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



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


Tax Subsidy


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



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


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


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


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


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


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


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


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?


““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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