Boosting innovation through R&D tax incentives

The World Bank recently published a blog article describing how well-designed R&D tax incentives can lead to innovation and growth. The article cites several findings of interest.

• The authors note there is broad consensus that government support to encourage private sector innovation generates spillovers that create greater economy-wide returns than private sector R&D investment alone. 

• 34 of 38 OECD countries offer R&D tax incentives.

• Studies find that R&D tax incentives increase business investment, but the magnitude of the growth varies. At the aggregate level, research typically finds an increase of $0.56 in R&D spending for each dollar of tax revenue not collected. When studying individual firms, researchers estimate that up to $2.50 in additional R&D spending may occur for each dollar of tax revenue not collected. 

• Why the difference? First, not all eligible firms claim the tax credit. Second, smaller firms tend to respond more strongly to incentives than larger firms. Third, the design of the tax credit affects performance. Specifically, the authors explain:

“The uptake is higher when expected benefits are substantial, compliance costs are low, and eligibility criteria are clear. Refundable tax credits – which enable loss-making firms to benefit – tend to generate greater additionality.”

• Recent research has also found tax incentives to be more effective for experimental development than for early-stage or basic research. Grant funding is more effective for early-stage, higher-risk research.

As we have repeatedly found in our own evaluation work, program design matters tremendously in determining if an incentive will be effective or not. Research and evaluation is showing how specific policy and program choices drive various policy outcomes for R&D tax incentives. 

Thanks to the World Bank for sharing its findings. I encourage you to read the full blog article, with research links. Please see:

Tax incentives for R&D can spur innovation and growth – when done right

Authors: Matej Bajgar and Chiara Chriscuolo

June 12, 2025