Tax incentives for innovation

Tax incentives for innovation, including in particular the incentives for R&D investments, are universally used policy tools. Their availability and generosity have significantly increased over the past three decades. The observed proliferation of R&D tax incentives raises the question of the effectiveness (as well as other potential unknown advantages) of these policy instruments. The purpose of this paper is to carry out an analysis of the reasons (1) why R&D tax incentives became such a popular policy tool and (2) why there was an increase in generosity of this kind of incentives in recent years. As far as the theoretical base for the analysis is concerned, the paper refers particularly to (1) the inter-jurisdictional competition theories relating to tax competition and (2) the (quasi-) public-good nature of knowledge and innovation. The analysis is carried out with the use of the existing data and research on the subject. The results indicate that these are the changes (processes taking place) in the international environment that have considerably stimulated the proliferation and the increase in generosity of R&D tax incentives.