Effectively Financing Private Sector Innovation? Toward a Conceptual Policy Framework

Our understanding of innovation policies has been significantly enhanced. However, there is still a gap in conceptualizing and analyzing the effectiveness of one of innovation policy’s most important tools: financial incentives. While scholars have developed an understanding of the effectiveness of direct versus indirect financial incentives, there is no clear theoretical framework that delineates what kind of financial instruments impact what kind of innovation, in what kind of firms and industries, and under what conditions. To start bridging this gap this paper first present and explain the different working and operational logic of the wide array of financial incentives employed worldwide, this analysis is then used to develop what is, to the best of our knowledge, the first conceptual framework discerning what financial tools fit what aims and contexts. Our framework allows the development of incentives tailored differently for different national innovation missions and market structures, and suggests that the growing reliance among OECD countries on indirect FIs in the form of tax incentives, is less then optimal, across all scenarios