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Policies for Growth - SIMPATIC 3 April 2014

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New evidence on the role of knowledge-based capital and young firms for European growth, including the role of R&D tax credits.
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Policies for Growth – Some New Evidence and Policy Implications Dirk Pilat, Deputy Director Directorate for Science, Technology and Industry d [email protected] SIMPATIC Annual Conference The Hague, 2-4 April 2014
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Page 1: Policies for Growth - SIMPATIC 3 April 2014

Policies for Growth – Some New Evidence and Policy Implications

Dirk Pilat, Deputy DirectorDirectorate for Science, Technology and [email protected]

SIMPATIC Annual ConferenceThe Hague, 2-4 April 2014

Page 2: Policies for Growth - SIMPATIC 3 April 2014

Outline

– Investment in knowledge-based capital – framework policies and some specific issues

– R&D tax credits and direct support

– Young firms, entrepreneurship and experimentation

Page 3: Policies for Growth - SIMPATIC 3 April 2014

Business investment in KBC and tangible assets in the United States (% GDP, 1972-2011)

3

Investment in knowledge-based capital is growing in importance …

4%

6%

8%

10%

12%

14%

16%

18%

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Inv

est

me

nt

(% o

f a

dju

ste

d G

DP

)

Investment in KBC

Investment in tangibles

Source: Corrado et al. (2012).

Page 4: Policies for Growth - SIMPATIC 3 April 2014

Business investment in KBC and tangible assets(as % of business sector value added, 2010)

Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources.4

… and accounts for over half of all business investment in several OECD countries

0

5

10

15

20

25

30

35

%Brand equity, firm-specific human capital, organisational capital R&D and other intellectual property products

Software and databases Non-residential physical assets

Page 5: Policies for Growth - SIMPATIC 3 April 2014

5

Such investments are often key to creating value and enabling differentiation

Source: IMD (2000) Innovation and Renovation: The Nespresso Story, IMD046, 03/2003. © Nespresso

DesignBrandin

g

R&D

Page 6: Policies for Growth - SIMPATIC 3 April 2014

Good framework policies are associated with investment in KBC

Page 7: Policies for Growth - SIMPATIC 3 April 2014

Policy message 1: Importance of framework policies for investment in KBC

Framework policies: well-functioning product, labour and capital markets and bankruptcy laws that do not overly penalise failure can raise the expected returns to investing in KBC. Through stronger competitive pressures and more efficient reallocation, which make

it easier for successful firms to implement and commercialise new ideas

By allowing resources to flow to innovative firms, and,

by lowering the costs of failure, encourage firms to experiment with uncertain growth opportunities.

Striking the right balance on stringency of EPL and between leniency and protection of creditors will depend on specific features of firms’ activities

Complementarities are important: well-functioning framework policies can enhance the effectiveness of other policies (e.g. innovation policies) and are stronger when other framework conditions are right (EPL and financing)

Page 8: Policies for Growth - SIMPATIC 3 April 2014

Policy message 2: Several knowledge-based assets require specific policy action, …

• The IPR system has not kept up with the growing importance of IPR and with continuing technological change – ensure that they are fit for purpose

• New assets require policy attention, e.g. big data – important policy include access, infrastructure, skills, and trust (e.g. privacy and security)

• Comprehensive skills strategies to develop skills, activate the available skills supply, and put them to good use.

Page 9: Policies for Growth - SIMPATIC 3 April 2014

PolandIreland

Slovak RepublicEstonia

KoreaUnited States

AustriaCzech Republic

AverageFlanders (Belgium)

JapanEngland/N. Ireland (UK)

GermanyCanada

AustraliaDenmark

NorwayNetherlands

FinlandSweden

100 80 60 40 20 0 20 40 60 80 100

Level 22 Level 32

Young adults (16-24 year-olds) All adults (16-65 year-olds)

… notably skills - proficiency in problem solving in technology-rich environments

%

9Source: OECD Survey of Adult Skills, October 2013.

Page 10: Policies for Growth - SIMPATIC 3 April 2014

Direct funding of business R&D and R&D tax incentives, 2011

As a percentage of GDP, 2011

Source: OECD Science, Technology and Industry Scoreboard 2013. http://dx.doi.org/10.1787/888932891112

Page 11: Policies for Growth - SIMPATIC 3 April 2014

Implied tax subsidy on R&D expenditures, 2013

Source: OECD Science, Technology and Industry Scoreboard 2013. http://dx.doi.org/10.1787/888932891150

Page 12: Policies for Growth - SIMPATIC 3 April 2014

Implied tax subsidy on R&D expenditures, 2013

Source: OECD Science, Technology and Industry Scoreboard 2013. http://dx.doi.org/10.1787/888932891150

Page 13: Policies for Growth - SIMPATIC 3 April 2014

Policy message 3: The innovation policy mix and …

Countries differ in the mix of innovation policies with most OECD countries increasingly relying on R&D tax incentives (than on direct support), and to volume based or hybrid R&D tax credit schemes.

Support policies might increase investment in innovation but might not necessarily increase growth Both direct support measures and R&D tax incentives have a positive effect on

R&D and innovation outcomes, but evidence on their impact on productivity growth is less clear-cut.

Might slow down reallocation and productivity growth in a country if they favour incumbents relative to startups (design is key)

More generous R&D tax incentives tend to benefit incumbent firms, leading to a less dynamic distribution of firm growth (in more R&D intensive sectors).

R&D tax incentives might be primarily subsiding incremental innovations amongst incumbents, as opposed to new to the market innovations associated with young entrepreneurial firms

Page 14: Policies for Growth - SIMPATIC 3 April 2014

Design of Innovation policies are crucial to minimise the fiscal cost and unintended consequences of these policies.

R&D tax incentives should: be refundable contain carry-over provisions Be designed as payroll withholding tax credit for R&D wages

This would allow firms in loss-making positions (e.g. startups) not to be at a disadvantage Incremental rather than volume-based Predictability and stability

Grants should: be non-automatic selection based on competitive and transparent selection process Include elements of ex- post evaluation ex-ante at the design stage

… the design of innovation policies matters

Page 15: Policies for Growth - SIMPATIC 3 April 2014

15

Entrepreneurship and financing - young firms create the new

opportunities …Contributions of young firms to employment, job creation and job destruction, 2001-2011

Source: OECD, DYNEMP project, forthcoming, March 2014.

Page 16: Policies for Growth - SIMPATIC 3 April 2014

16

… and not SMEs in general

Average over 18 countries, 2001-2011, in %

Source: OECD, DYNEMP Project, forthcoming, March 2014.

Page 17: Policies for Growth - SIMPATIC 3 April 2014

But growth of young firms is a challenge in many OECD countries …

Average size of start-ups and old firms, in persons employed, services sector

Source: OECD, DYNEMP project, forthcoming, see OECD, Science, Technology and Industry Scoreboard 2013. http://dx.doi.org/10.1787/888932904279

Page 18: Policies for Growth - SIMPATIC 3 April 2014

… and policies influence the reallocation to innovative firms

Source: Andrews, Criscuolo and Menon (2013)

Change in firm capital associated with a 10% change in the patent stockSelected OECD countries; 2002-2010

Page 19: Policies for Growth - SIMPATIC 3 April 2014

Key findings

1. Net job creation does not come from all small, but only from young firms.

2. Growth of young innovative firms means “up” or “out”; entrepreneurs need flexibility to experiment with business models.

3. Growth dynamics of firms differs across countries; in some countries, firms hardly scale after entry.

4. Policy matters, and has impacts on the scope for experimentation, and for the allocation of resources to the more innovative firms.

19

Page 20: Policies for Growth - SIMPATIC 3 April 2014

Policy message 4: Foster the contribution of young firms to employment and productivity

• Allow for experimentation: Reduce barriers to the entry (e.g. red tape), growth (e.g. size-specific regulations), and exit/failure of firms (e.g. penalising bankruptcy legislation, strict employment protection legislation).

• Level the playing field for new and innovative firms: Some policies favour incumbents and MNEs (e.g. R&D tax credits).

• Strengthen the innovation system for young and innovative firms, e.g. through enhanced access to (risk) capital, network development, mentoring of entrepreneurs, skills development, etc.

• Complete the European Internal Market, so firms can scale more easily across borders.

20

Page 21: Policies for Growth - SIMPATIC 3 April 2014

Thank you

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