Do Government Incentives to Promote R&D Increase Private R&D Investment?[Productivity Differences]

R&D incentives are a popular policy option to encourage private R&D worldwide. This paper provides an updated survey of R&D incentives’ effect on private R&D investment, including evaluations from developing countries. It assesses the pattern of R&D incentives, and reviews recent literature on the efficacy of these incentives. It reveals that R&D incentives generally increase private R&D, but to a varying extent depending on incentive types, countries’ income levels, industry and firm characteristics, and the design and implementation of the incentives. Overall, variability of the effect on private R&D is greater for direct incentives than indirect incentives. The effect of indirect incentives is found to be smaller in developing countries than developed countries, contrary to the predictions of growth theory. This paper investigates the potential reasons for these findings and summarizes policy implications for governments considering upgrading or adopting R&D incentives.