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The Forum > Article Comments > Advantage Australia > Comments

Advantage Australia : Comments

By Nicholas Gruen, published 30/9/2008

The current R&D tax concession is inefficient and tilts the playing field away from the most innovative firms.

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Nick, IC and BIE modelling showed that the tax concession led to small increases in business R&D at a high cost. Massive returns would have been needed to justify that additional R&D, so high that no government incentive would have been needed.

The rationale for subsidising R&D is that without it, socially sub-optimal amounts of R&D would be undertaken. I've never seen any research that demonstrated that; cf Zvi Griliches' last book reflecting on 50 years work in the field.

(Well-run) businesses will undertake R&D to the point that the risk-adjusted rate of return equates to the best available from other uses of funds. They are better placed to determine that than are governments. As for alleged positive externalities, many studies have thrown doubt on that argument - I'm sorry, having retired very ill six years ago, I don't have references to hand, but the evidence suggested that returns were largely internalised to producers and users of R&D; spillovers tended to come though proximity to other innovative firms, a point favouring clustering (which would always be small-scale in Australia compared to countries where gains were demonstrated) rather than R&D subsidy.

The best government support for innovation is regulatory, tax and IR regimes which foster entrepreneurial spirit and the opportunity to make and retain wealth, supported by good education systems. Moving general policies in that direction would be far more effective than R&D support schemes.
Posted by Faustino, Tuesday, 30 September 2008 4:39:39 PM
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