Many governments have adopted and maintained research & development tax credits and incentives. Governments use R&D tax incentives as they’re easy to implement, foster innovation, and produce jobs and growth. They can be especially helpful to industries that are R&D heavy, and when they’re aimed at small to medium-sized businesses or startups.

U.K. businesses benefit from the Research & Development (R&D) Tax Refund. Let’s take a look at how R&D delivers value to taxpayers and can help grow the U.K. economy.

 

Why do Governments Invest in R&D?

Small businesses are the greatest force for job creation in many developed economies. They are also a massive employer, U.K. small to medium sized businesses employ 60% of private sector employees.

A study by Cleveland’s Federal Reserve suggests that these businesses, responsible for the most job growth, struggle to find the funds they need. Forward thinking Governments have stepped in here, knowing that a strong small business sector means a thriving economy. They believe that investment in SMEs can significantly improve productivity, generate jobs, and raise GDP.

Governments provide tax incentives (or lower tax rates) to increase their international attractiveness, and lure companies to their shores. These same policies, when structured well, offer opportunity to their own citizens and businesses. Incentives promote private innovation and raise a business’s R&D eligible spending. Volume-based incentives and tax credits have proven to be especially effective, resulting in the highest increase in spending. According to a study by Lokshin and Mohnen (2012), research and development funding is especially effective in increasing SME productivity.

 

The Finnish Mobile (Cell) Phone Example, 1990-2001

A great example of how government R&D programs can positively impact GDP is the case of the Finnish Mobile Phone.

Way back in 1990, the Finnish Government had the vision and foresight to identify cell phones as a major growth opportunity. Smartly, they decided to invest in the industry, and to share the risk with other major players. The ‘Finnish Model’ was not created rapidly nor in response to the country’s economic woes and societal depression of the early 1990s (Lemola 2003). Rather, it was a gradual change over more than three decades of amendments to policy doctrines, institutions, organisations and instruments. These changes would lead to Finland’s current and highly successful R&D policy, which determines budgets based on operational expenditure and performance agreements.

How Success Was Achieved

When a government invests in R&D, it is investing in new technology and future capabilities. The investment in innovation in Finland sowed the seeds for one of the largest ever mobile phone companies, Nokia. Nokia dominated the mobile phone market in the 90’s and early 2000’s (remember the 3210?), right up until the smartphone was invented. Nokia’s success, coupled with all the associated industries and support, significantly impacted Finnish GDP.

Success of the Finnish Model

As a result of their R&D policies, the Finnish government saw a multiplier effect of about 66 on its initial R&D expenditure (Walwyn 2007). The multiplier effect was achieved by first leveraging a businesses’ R&D expenditure (at a level of about 1:3), which then translated into an increase in GDP of about $22 per $1 spent. This is a clear example of foresight, research and policy working together to create a great outcome.

 

Conclusion

Governments can help improve the economy, increase GDP, and promote social welfare through policy. To encourage innovation and job growth, R&D tax incentive programs can be offered to businesses. Finnish economic data from 1990-2001 shows the success a country can have when leaders are dedicated to innovation, and implement smart and supportive policy. Through it’s R&D program, the U.K. Government gives innovative companies valuable refundable tax credits. These types of incentives increase business R&D spending, resulting in new products, services and systems. Ultimately, governments can grow their economy and improve the wellbeing of their citizens by investing in R&D.

 

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