This paper investigates the effect of the major R&D policy instruments on business funded R&D expenditure. The analysis covers 17 OECD countries over the period 1981-1996. It is found that government funding of R&D performed by business firms and tax relieves have a positive impact on privately financed R&D. The two policy tools are more effective when stable over time and are substitutes (increasing one of them reduces the impact of the other). The impact of direct government funding is more long-lived than that of tax relieves. The stimulating effect of government funding varies with respect to its level relative to the level of business funded R&D : it increases up to a threshold of about 14 per cent and decreases beyond. Research performed in public labs and universities seems to have a crowding out effect on private R&D. However, this effect of public R&D is mainly due to defence-oriented government funding, while civilian public research is neutral for business R&D."
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Guellec et al. (2001) studied this question.