No evidence shows that R&D tax credits increase R&D – firms who are already engaging in R&D are the ones the take advantage of the tax credit

While there is a research component in innovation, there is not a linear relationship between research and development, innovation and economic growth. While it is important that the frontiers of science advance and that economies develop the nodes and networks that enable knowledge to be transferred between different organizations and individuals, it does not follow that subsidizing the activity of R&D per se within individual firms is the best use of taxpayers' money. Although it is common sense that there is a relationship between a decision to engage in R&D and its cost (see Myth 1), qualitative surveys of the effectiveness of the R&D tax credit for both large and small firms provide little evidence that it has positively impacted the decision to engage in R&D, rather than simply providing a welcome cash transfer to some firms that have already done so.7 There is also a potential problem under the current R&D tax credit system, in many countries, that it does not hold firms accountable as to whether they have conducted new innovation that would not otherwise have taken place, or simply pursued routine forms of product development. In time, therefore, as the entrepreneurial State is built, it would be more effective to use some of the expenditure on R&D tax credits to directly commission the technological advance in question. Recently, the Netherlands has introduced an R&D tax credit that targets not the income from R&D (easily fudged) but R&D workers—and this has been found to be more effective, creating the kind of 'additionally' that income-based R&D tax credits don't (Lockshin and Mohnen 2012).