Tax Versus Non-tax Incentives to Stimulate Innovation and Entrepreneurship: An International Perspective

Governments around the world have been trying to encourage domestic innovation and entrepreneurship as an important means for reducing the unemployment rate, enhancing gross domestic product (GDP) growth, and deepening the knowledge-based economy. Government policies to promote innovation and entrepreneurship include both tax and non-tax incentives. Nevertheless, many governments often use only tax incentives and do not pay sufficient attention to non-tax incentives. Furthermore, some governments limit the incentives to post startup stages without considering the pre-startup stage. Such an approach raises a question about the appropriate mix of government incentives for stimulating innovation and entrepreneurship. To answer this question, this chapter aims to identify and examine the proper mix of tax and non-tax incentives that capture various stages of the process of innovation and entrepreneurship development. The chapter employs qualitative research methods to analyze archival data and primary data (obtained from a focus group study of experts from academia, industry, and government). The government incentives are matched with each stage of the innovation and entrepreneurship development process, taking the specific nature of each stage into account. In the pre-startup/ideation stage, more weights should be given to non-tax incentives to build the entrepreneur/innovator capacities through training and helping them to access various business services to launch a new business. In the startup or conversion stage, both tax and non-tax incentives are important, requiring a combination of incentives that reduce the costs of launching a new business, access to finance and providing preferential tax treatment to venture capital/crowd funding and implementing patent box. In the scale-up/diffusion stage, more weight should be given to tax incentives to minimize the tax burden on innovation and entrepreneurship. This include implementing a reduced tax rate or giving tax exemption for a limited period. In addition, the chapter also recommends granting research and development (hereafter R&D) tax incentives in all stages and taxing the labor income of scientists and engineers at a reduced rate.