Expanding the R&;E tax credit to drive innovation,competitiveness and prosperity

The research and experimentation (R&E) tax credit has long been the subject of criticism. Some argue that if the goal is more research and innovation, it’s better to increase direct federal funding of research. Others argue that the credit is not effective, that companies would do the research in any case. Some object the very notion of using tax policy to influence private sector behavior, preferring instead a more “neutral” tax code. Still others, including Tassey in this volume, point to what they see are a host of design flaws in the current credit, including that its incremental nature reduces its effectiveness. I will argue here that most of these arguments are mistaken. To promote innovation in a global economy both direct funding and indirect tax incentives are needed. The credit, while it can be improved, has been shown to be effective in stimulating research. Moreover, far from distorting the market, the credit corrects for a market failure where firms are unable to capture all of the benefits of corporate research, leading them to under invest in research. Finally, while reform and expansion are needed, it would be a mistake to shift to a completely flat credit. However, several important changes should be made including doubling the current value of the credit, modifying the Alternative Simplified Credit to become incremental, and expanding the flat credit for collaborative R&D.

Location choices within global innovation networks: the case of Europe

Rapid growth in internationalization of corporate R&D has spurred considerable interest since the 1990s. Foreign R&D is still mainly driven by the expansion of international production, but technology sourcing has become an increasingly important driver of dispersion. Actually, differences across sectors and companies tend to obscure the mix of motivations behind the development of global innovation networks. This paper distinguishes the various drivers of the international dispersion of corporate R&D in order to elaborate a typology of foreign R&D units, including in emerging countries. This typology is used to discuss the emergence of differentiated global innovation networks and the location choices by type of R&D unit. It is applied to foreign R&D projects in Europe in high and low cost countries between 2002 and 2005. It is then used to discuss the weakening attractiveness of the European Union for R&D activities and the relevant policies that countries can design to attract different types of units.

Geographic and technological R&;D spillovers within the triad: micro evidence from US patents

This paper aims at assessing the magnitude of R&D spillover effects on large international R&D companies’ productivity growth. In particular, we investigate the extent to which R&D spillover effects are intensified by both geographic and technological proximities between spillover generating and receiving firms. We also control for the firm’s ability to identify, assimilate and absorb the external knowledge stock. The results estimated by means of panel data econometric methods (system GMM) indicate a positive and significant impact of both types of R&D spillovers and of absorptive capacity on productivity performance.

Innovation-related data in bureau of economic analysis international economic surveys

This paper describes innovation-related data available from international economic surveys conducted by the U.S. Bureau of Economic Analysis. These data are collected in conjunction with the international transactions accounts of the United States and in surveys of the operations of multinational companies (MNCs). The paper focuses on five innovation-related series: receipts and payments of royalties and license fees; exports and imports of research, development, and testing services; sales of services by foreign affiliates classified in the research and development services industry; MNC R&D spending; and MNC R&D employment.

Creative internationalization: widening the perspectives on analysis and policy regarding international R&D activities

Internationalization in R&D is further growing; it is changing its geographical balance, as it is shifting somewhat to the Far East, and its nature, increasing the global quest for talent and good research conditions as well as for low cost R&D. This paper focuses on the European perspective, i.e. it discusses current challenges Europe faces vis-à-vis trends in industrial R&D, but the findings and arguments are more general ones. It argues that our perspective on internationalization is still shaped too much by a zero sum-rationale, whereby one location wins R&D capacity that another location loses. It develops a cost–benefit matrix in order to capture the overall costs and benefits of international R&D activities more broadly. The paper argues that more creativity is needed, that our perspective needs to be broadened to tackle all variables conditioning international activities in R&D (including local conditions of demand and discourse) and to stress the importance of the absorption of global knowledge by as many actors within an innovation system as possible. On the basis of recent survey data the paper furthermore concludes that public research should be thought of as a trans-national transmission belt of knowledge and as the prime factor that shapes the attractiveness and effectiveness of a location for business R&D. Finally, it is argued that policy schemes geared towards international R&D need to accept and tackle the issue of co-ordination of governance and to take advantage of the flexible possibilities offered at the European level, beyond the logic of the European Framework Programme.

Strategic spin-off: a new incentive contract for managing R&D researchers

Innovation is a strategic challenge for high-tech companies and as such, justifies large investments in R&D. After exploring the limits of the underlying postulates of the organizational management of innovation (the necessary specialisation of researchers, the possibility of human discontinuity of innovation and possibility of controlling researchers), the objective of this paper is to show that the relationship between managers and researchers is characterised by asymmetric information (Laffont , J. J. (1985). Economie de l’incertain et de l’information, Economica.) to the benefit of the researchers. This asymmetry supposes the setting up of management practices which incite researchers to optimise the company’s interests, but this can only be done to at the expense of management control. In R&D activities, the informational asymmetry in agency relationship can be overcome by incentive managerial practices (Jensen, M. C., & Meckling, W. H. (1976) Theory of the firm: managerial behavior, agency cost, and ownership structure. Journal of Financial Economics, 3(4), 305–360.). The relationship between the manager (principal) and the researcher (agent), can be resolved by setting up the practice of strategic spin-off. This practice which enables a researcher to create a company based on work that he himself has carried out within the R&D department of his “mother” company, constitutes both an economic incentive (through the status of shareholder) and a symbolic one (through the status of entrepreneur). The incentive is strong for the researcher both to reveal his information and to obtain financial value from his research. Implementing this incentive contract means putting into place certain managerial and organisational practices designed to accompany the researcher–entrepreneur: (training, incubator, venture-capital structure etc.). The practice of strategic spin-off is beginning to emerge in high tech enterprises. This is why we have chosen to make an in-depth case study of the French company most involved in strategic spin-off, namely France Telecom.

Government strategies to attract R&D-intensive FDI

Competition among countries to attract the research and development (R&D) activities of multinational enterprises has increased substantially during the last years, but the strategies used by governments in this competition still remain largely unexplored. This paper addresses that gap by proposing a taxonomy of the policy instruments available to stimulate inward R&D-intensive foreign direct investment (FDI) and presenting the results of a comparative case study of two EU countries: Spain and Ireland. The main conclusion is that an efficient promotion of R&D-intensive FDI calls for a closer connection between innovation policy and inward investment promotion, which are two policy areas that have traditionally operated rather separately. In addition, investment promotion agencies targeting R&D-intensive FDI are advised to reconfigure the scope of services they provide by placing more emphasis on after-care, since R&D-intensive FDI tends to be evolutionary rather than purely greenfield.

Internationalisation of R&D and embeddedness: the case of Austria

Internationalisation of corporate R&D—driven mainly by multinational enterprises (MNEs)—has received increasing interest recently. As a small open economy, Austria faces special challenges with regard to this on-going process. The share of Austrian R&D financed from abroad is outstanding in international comparison. Indeed, a significant portion of R&D activities in Austria is defined by strategic decisions of international corporations, which are re-assessing their spatial division of labour continuously. In our paper, we analyse the characteristics of these foreign-owned corporations in Austria and demonstrate that they form the more ‘modern’ part of Austrian industry. At the same time, we show that these companies and R&D facilities are embedded in the Austrian national innovation system (NIS) to a large extent. This embeddedness is also explicitly and implicitly supported by the Austrian technology policy. We conclude that this high degree of embeddedness in the NIS may be crucial for the sustainability of foreign-owned R&D facilities.

Research spending under regulatory uncertainty

Using a simple model this paper examines firm behavior under three types of uncertainties dealing with innovation occurrence, innovation scale, and a possible threat of regulatory action. Firms compete in the existing product market and engage in R&D in Stage I. Innovation takes place in the second stage, the successful firm achieves a monopoly and becomes aware of the scale of innovation. Regulators examine the new product and decide on possible action. Results show that increases in the probability of regulation reduce research spending as do higher regulatory taxes. These results are reversed when the regulator grants a subsidy, instead. An increase in the probability of drastic innovation increases research spending under certain conditions. The effect of market entry is unclear. Our results generally carry through when the model is extended to include only an innovation race or the nondrastic innovation is alternately regulated. Policy implications are discussed.

Organisational change and innovation system dynamics: the reform of the UK government defence research establishments

Since the end of the Cold War, ministries of defence in Europe and the United States have sought new models for the management of government defence research laboratories. The United Kingdom’s reform and subsequent privatisation of its government defence research establishments (GDREs) represents one of the most radical policy responses. This paper considers the UK case through the lens of innovation systems theory and uses defence labs reform to examine the impact of organisational change on the dynamics of an innovation system. The potential policy implications for the management of government defence research laboratories are also considered.

The survey of industrial R&;D—patent database link project

This article details the construction of a firm-year panel dataset combining the NBER patent dataset with the Survey of Industrial R&D conducted by the Census Bureau and National Science Foundation. The dataset constitutes a platform that offers an unprecedented view of the R&D-to-patenting innovation process and a close analysis of the strengths and limitations of the R&D survey. The files are linked through a name-matching algorithm customized for uniting the firm names to which patents are assigned with the firm names in the Census Bureau’s SSEL business registry. Through the Census Bureau’s file structure, R&D can be linked to the operating performances of each firm’s establishments, further facilitating innovation-to-productivity studies.

Advancing measures of innovation in the United States

This paper introduces major themes addressed in this special issue, which is based on NSF's Division of Science Resources Statistics (SRS) workshop Advancing Measures of Innovation—Knowledge Flows, Business Metrics, and Measurement Strategies, held on June 6-7, 2006 near Washington, D.C. The first two sections describe the workshop and provide a brief background on R & D and innovation metrics. The last section introduces the papers. They are based on selected workshop presentations along with additional invited papers.

Foreign investment innovation: a review of selected policies

Whereas foreign investment innovation (FII) has become increasingly common, after decades of debate it is still unclear whether it is desirable for the home country or for the company’s host country. This paper reviews articles from three complementary economic and business traditions which investigate this phenomenon and propose policies based on facts: the economics of technological change tradition, the international business (IB) tradition, and the line of research on international technology transfers. Articles in line with these strands of theory complement each other because they approach different aspects of complex events while explaining FII and its effects on host and home countries. Host countries obtain maximum benefits from FII when affiliates import foreign technology, purchase their inputs in the host country and enjoy product and technological autonomy vis-à-vis the parent. Different types of MNEs, affiliates and foreign R&D units have different potentials for transferring technology to host countries and provide different scope for policies. The authors recommend that governments encourage direct vertical linkages between MNEs and domestic suppliers who could reap the benefits from foreign knowledge. However, some important success factors remain exogenous to governments. As for indigenous MNEs, it is a matter of controversy whether governments should always stimulate them to conduct research in foreign locations or, alternatively, incentive them to stay at home. The need for additional evidence is still considerable in many respects.

European group taxation-the role of exit taxes

The European Commission’s proposal to establish a Common Consolidated Corporate Tax Base reduces both compliance and administrative costs for European groups. The proposal would replace separate entity accounting with a profit allocation based on formula apportionment. Since formula apportionment rests on the source principle, the group faces an incentive to invest in low tax member states. Residence-based group taxation based on separate entity accounting could be an alternative. The subsidiaries’ profits and losses are attributed to the parent of the group (current inclusion), and the European group’s profit is taxed at the corporate income tax rate of the parent. The parent’s state of residence grants a foreign tax credit. Current inclusion prevents tax distortions regarding the location of investments, if no limitations on the foreign tax credit exist. A serious drawback of residence-based taxation is the incentive to move the group’s headquarter to a low tax member state. At present, this incentive is mitigated by exit taxation. Applicable exit taxation rules, however, most likely infringe upon European law. Rules that conform to European law probably abolish unfavourable liquidity effects upon exit. In net present value terms, however, exit taxes still render it burdensome for the group to move the headquarter to another member state.

Globalization of technology-based growth: the policy imperative

The United States became the dominant technology-based economy after World War II and held that position for decades by accumulating a huge base of superior technical, physical, organizational, and marketing assets. However, the world is witnessing the rapid globalization of technology-based competition, which is the result of major commitments by many nations to investment in technology and its effective utilization. The changing dynamics of such competition requires revisions to the centuries’ old law of comparative advantage and the Schumpeterian process of creative destruction. However, U.S. technology-based growth policies have at best stood still for most of this period. The R&D intensity of the U.S. economy is below its peak in the 1960s and its vaunted “high-tech sector” is too small and increasingly challenged to carry the remaining sectors, as was the case before globalization began in earnest. A major reason for inadequate adaptation is the “installed base effect,” which results from the accumulation of the above types of economic assets and in turn creates both complacency and resistance to the need for adaptation. Weak recoveries from the most recent recessions and the sluggish growth in real incomes are major indicators of structural problems that are not being addressed. Catch-up will require adoption of more comprehensive growth policies, implemented with considerably more resources and based on substantive policy analysis capabilities.

Towards systematic knowledge building: An anti-crime research and development continuum

This response argues that the National Research Council (NRC) report, while valuable and thorough, would have benefited from conceptualizing evaluation activities along a continuum of knowledge development, with evaluations initially verifying the effectiveness of program concepts, before moving to evaluations of the feasibility and generalizability of anti-crime strategies and, finally, to evaluations of the costs and benefits of implementation of new strategies.

Between market forces and knowledge based motives: the governance of defence innovation in the UK

The purpose of this contribution is to examine the evolutionary transformations that have characterised the UK defence innovation system since the mid 1980s. It focuses on the central and challenging issue faced by the Ministry of Defence (MoD) in implementing effective governance mechanisms emerging from the continuous trade-off between short-term market driven measures motivated by efficiency arguments, and more long term and relational considerations in terms of knowledge economics. Furthermore, in terms of technology transfer, this evolution has been accompanied by a gradual shift from an initial logic of spin-off to society expected from government driven military projects, to a logic of spin-in where the main concern of the military sector is to broaden its industrial and R&D base.

Do specific forms of university-industry knowledge transfer have different impacts on the performance of private enterprises? An empirical analysis based on Swiss firm data

This study investigates the impact of a wide spectrum of Knowledge and Technology Transfer (KTT) activities (educational and research activities, activities related with technical infrastructure, and consulting) on two innovation indicators (a) in the framework of an innovation equation with variables for specific forms of KTT activities as additional determinants of innovation, and (b) based on a matched-pairs analysis for several specific forms of KTT activities. The data used in the study were collected by means of a survey of Swiss enterprises that took place at the beginning of 2005. We found that research and educational activities improve the innovation performance of firms in terms of sales of considerably modified products, research activities in addition also in terms of sales of new products. This could be shown by several methods: the innovation equation approach with instrument variables for specific forms of KTT activities as well as two matching methods.

The science commons in health research: structure,function, and value

The “science commons,” knowledge that is widely accessible at low or no cost, is a uniquely important input to scientific advance and cumulative technological innovation. It is primarily, although not exclusively, funded by government and nonprofit sources. Much of it is produced at academic research centers, although some academic science is proprietary and some privately funded R&D enters the science commons. Science in general aspires to Mertonian norms of openness, universality, objectivity, and critical inquiry. The science commons diverges from proprietary science primarily in being open and being very broadly available. These features make the science commons particularly valuable for advancing knowledge, for training innovators who will ultimately work in both public and private sectors, and in providing a common stock of knowledge upon which all players—both public and private—can draw readily. Open science plays two important roles that proprietary R&D cannot: it enables practical benefits even in the absence of profitable markets for goods and services, and its lays a shared foundation for subsequent private R&D. The history of genomics in the period 1992–2004, covering two periods when genomic startup firms attracted significant private R&D investment, illustrates these features of how a science commons contributes value. Commercial interest in genomics was intense during this period. Fierce competition between private sector and public sector genomics programs was highly visible. Seemingly anomalous behavior, such as private firms funding “open science,” can be explained by unusual business dynamics between established firms wanting to preserve a robust science commons to prevent startup firms from limiting established firms’ freedom to operate. Deliberate policies to create and protect a large science commons were pursued by nonprofit and government funders of genomics research, such as the Wellcome Trust and National Institutes of Health. These policies were crucial to keeping genomic data and research tools widely available at low cost.