1) Investment in knowledge-based capital, such as research and development, brands, and organizational capital, now accounts for over half of business investment in several OECD countries and is growing in importance. 2) Well-functioning framework policies around product markets, labor markets, and bankruptcy laws can encourage investment in knowledge-based capital by raising returns and allowing resources to flow to innovative firms. However, policies also need to address specific assets like intellectual property, skills, and access to data. 3) Countries differ in their policy mixes for innovation, with many relying more on R&D tax incentives than direct funding. While both can increase R&D, the impact on productivity and the design of policies matters to avoid

1. Policies for Growth – Some New
Evidence and Policy Implications
Dirk Pilat, Deputy Director
Directorate for Science, Technology and Industry
dirk.pilat@oecd.org
SIMPATIC Annual Conference
The Hague, 2-4 April 2014

2. Outline
– Investment in knowledge-based capital – framework
policies and some specific issues
– R&D tax credits and direct support
– Young firms, entrepreneurship and experimentation

3. Business investment in KBC and tangible assets in the United States
(% GDP, 1972-2011)
3
Investment in knowledge-based capital is
growing in importance …
4%
6%
8%
10%
12%
14%
16%
18%
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Investment(%ofadjustedGDP)
Investment in KBC
Investment in tangibles
Source: Corrado et al. (2012).

4. Business investment in KBC and tangible assets
(as % of business sector value added, 2010)
Source: OECD calculations based on INTAN-Invest, Eurostat and multiple national sources.
4
… and accounts for over half of all business
investment in several OECD countries
0
5
10
15
20
25
30
35
%
Brand equity, firm-specific human capital, organisational capital R&D and other intellectual property products
Software and databases Non-residential physical assets

5. 5
Such investments are often key to creating value
and enabling differentiation
Source: IMD (2000) Innovation and Renovation: The Nespresso
Story, IMD046, 03/2003. © Nespresso
Design Branding
R&D

6. Good framework policies are associated with
investment in KBC

7. Policy message 1: Importance of framework
policies for investment in KBC
 Framework policies: well-functioning product, labour and capital
markets and bankruptcy laws that do not overly penalise failure can
raise the expected returns to investing in KBC.
 Through stronger competitive pressures and more efficient reallocation, which
make it easier for successful firms to implement and commercialise new ideas
 By allowing resources to flow to innovative firms, and,
 by lowering the costs of failure, encourage firms to experiment with uncertain
growth opportunities.
 Striking the right balance on stringency of EPL and between leniency
and protection of creditors will depend on specific features of firms’
activities
 Complementarities are important: well-functioning framework
policies can enhance the effectiveness of other policies (e.g.
innovation policies) and are stronger when other framework
conditions are right (EPL and financing)

8. Policy message 2: Several knowledge-based assets
require specific policy action, …
• The IPR system has not kept up with the growing
importance of IPR and with continuing technological
change – ensure that they are fit for purpose
• New assets require policy attention, e.g. big data –
important policy include access, infrastructure, skills, and
trust (e.g. privacy and security)
• Comprehensive skills strategies to develop skills, activate
the available skills supply, and put them to good use.

9. 100 80 60 40 20 0 20 40 60 80 100
Poland
Ireland
Slovak Republic
Estonia
Korea
United States
Austria
Czech Republic
Average
Flanders (Belgium)
Japan
England/N. Ireland (UK)
Germany
Canada
Australia
Denmark
Norway
Netherlands
Finland
Sweden
Level 2 Level 3
Young adults (16-24 year-olds) All adults (16-65 year-olds)
… notably skills - proficiency in problem solving
in technology-rich environments
%
9
Source: OECD Survey of Adult Skills, October 2013.

10. Direct funding of business R&D and R&D tax
incentives, 2011
As a percentage of GDP, 2011
Source: OECD Science, Technology and Industry Scoreboard 2013.
http://dx.doi.org/10.1787/888932891112

11. Implied tax subsidy on R&D expenditures, 2013
Source: OECD Science, Technology and Industry Scoreboard 2013.
http://dx.doi.org/10.1787/888932891150

12. Implied tax subsidy on R&D expenditures, 2013
Source: OECD Science, Technology and Industry Scoreboard 2013.
http://dx.doi.org/10.1787/888932891150

13. Policy message 3: The innovation policy mix
and …
 Countries differ in the mix of innovation policies with most OECD
countries increasingly relying on R&D tax incentives (than on direct
support), and to volume based or hybrid R&D tax credit schemes.
 Support policies might increase investment in innovation but might not
necessarily increase growth
 Both direct support measures and R&D tax incentives have a positive effect on
R&D and innovation outcomes, but evidence on their impact on productivity
growth is less clear-cut.
 Might slow down reallocation and productivity growth in a country if
they favour incumbents relative to startups (design is key)
 More generous R&D tax incentives tend to benefit incumbent firms, leading to a less
dynamic distribution of firm growth (in more R&D intensive sectors).
 R&D tax incentives might be primarily subsiding incremental innovations amongst
incumbents, as opposed to new to the market innovations associated with young
entrepreneurial firms

14. Design of Innovation policies are crucial to minimise the fiscal cost and
unintended consequences of these policies.
R&D tax incentives should:
 be refundable
 contain carry-over provisions
 Be designed as payroll withholding tax credit for R&D wages
This would allow firms in loss-making positions (e.g. startups) not to be at a
disadvantage
 Incremental rather than volume-based
 Predictability and stability
Grants should:
 be non-automatic
 selection based on competitive and transparent selection process
 Include elements of ex- post evaluation ex-ante at the design stage
… the design of innovation policies matters

15. 15
Entrepreneurship and financing - young
firms create the new opportunities …
Contributions of young firms to employment, job creation and job destruction, 2001-2011
Source: OECD, DYNEMP project, forthcoming, March 2014.

16. 16
… and not SMEs in general
Average over 18 countries, 2001-2011, in %
Source: OECD, DYNEMP Project, forthcoming, March 2014.

17. But growth of young firms is a challenge in many
OECD countries …
Average size of start-ups and old firms, in persons employed, services sector
Source: OECD, DYNEMP project, forthcoming, see OECD, Science, Technology and
Industry Scoreboard 2013. http://dx.doi.org/10.1787/888932904279

18. … and policies influence the reallocation to
innovative firms
Source: Andrews, Criscuolo and Menon (2013)
Change in firm capital associated with a 10% change in the patent stock
Selected OECD countries; 2002-2010

19. Key findings
1. Net job creation does not come from all small, but only from
young firms.
2. Growth of young innovative firms means “up” or “out”;
entrepreneurs need flexibility to experiment with business
models.
3. Growth dynamics of firms differs across countries; in
some countries, firms hardly scale after entry.
4. Policy matters, and has impacts on the scope for
experimentation, and for the allocation of resources to the
more innovative firms.
19

20. Policy message 4: Foster the contribution of young
firms to employment and productivity
• Allow for experimentation: Reduce barriers to the entry (e.g.
red tape), growth (e.g. size-specific regulations), and exit/failure of
firms (e.g. penalising bankruptcy legislation, strict employment
protection legislation).
• Level the playing field for new and innovative firms: Some
policies favour incumbents and MNEs (e.g. R&D tax credits).
• Strengthen the innovation system for young and
innovative firms, e.g. through enhanced access to (risk) capital,
network development, mentoring of entrepreneurs, skills
development, etc.
• Complete the European Internal Market, so firms can scale
more easily across borders.
20

21. Thank you
21
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Contact: Dirk.Pilat@oecd.org
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