Innovation increases when tax credits and grants used in combination

Canadian firms that receive both R&D grants and use R&D tax credits are responsible for more world-first product innovations and are more successful in commercializing those inventions, says a new European study. Using a variety of innovation performance measures, it demonstrates that firms that use credits and grants in combination were most successful in immature markets and gained a significant amount of their revenue from first-to-market innovations.

Drawing on data from the Statistics Canada 2005 innovation survey, the first-of-its-kind study examines firms that received tax credits only and those that received both tax credit and grants, zeroing in on manufacturing firms of at least 20 employees and $250,000 in revenue. Of the sample used, 2,200 companies used tax credits only, while 585 utilized both tax credits and grants. Nearly 3,300 used neither. Only 66 used government grants only and were not examined.

"Firms that benefited from both policy measures were significantly more innovative than their counterparts that only benefited from R&D tax incentives," state authors Charles Bérubé and Pierre Mohnen, researchers with United Nations Univ and the Maastricht Economic and social Research and training centre on Innovation and Technology (MERIT). "The R&D grants program stimulates innovation precisely in areas where market failure in highest."

The report notes that direct support or subsidies allow governments to retain control over the type of R&D conducted and to "promote mission objectives". Firms resident in Quebec use a combination of support measures more than other Canadian jurisdictions.

The report contains two major caveats. StatsCan data do not include the level of government support for tax credits and grants. Therefore it "cannot shed light on the efficiency of the tax credit versus direct grants". In addition, no data exist for the value of innovations produced.

"It is possible that grant programs have more impact on the value of innovation because of its inherent capacity to choose promising projects," states the report.

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