ZEW Study on Germany's Technological Performance – Germany Should Enhance Tax-based R&D Funding

To stay competitive on global markets, German companies need to significantly increase their investments in research and development (R&D). In order to motivate especially small and medium-sized firms, Germany should opt for a direct, tax-based R&D funding, as it already exists in most OECD countries.

This is a main result of the new study on Germany’s technological performance conducted by a consortium of institutes under the lead management of the Centre for European Economic Research (ZEW), Mannheim, on behalf of the German Federal Ministry of Education and Research.

Up until now, German innovation policy has mainly relied on direct funding for R&D projects in companies. On an international level, scepticism has increased towards direct government involvement in the setting of technological agendas for the private sector. Especially the technology decisions through government programmes that are connected to a direct R&D project funding are viewed more and more critically. This problem would not exist if the R&D funding was part of the tax system.

In the case of introducing a more intensively tax-based R&D funding, the study on Germany’s technological performance pleads for the funding of all kinds of R&D expenditure. The concept of such a funding requires a clear definition of the word R&D. Ceilings for the annual tax reliefs per company limit the fiscal burden to the government without jeopardising the breadth of the funding measure’s impact. Another favourable side effect of the tax-based R&D funding would be the fact that it constitutes a fast-working instrument for the rise of the companies’ R&D intensity. This increase is an essential condition for raising the investments in R&D to three per cent of the German gross domestic value by the end of the decade. This is a goal defined in the Coalition Agreement by the German Federal Government and an important contribution to making Europe one of the most innovative economies in the world as set in the Lisbon Agenda. However, Germany still has a long way to go before attaining this goal.

In terms of the intensification of research and development activity particularly in firms, a clear signal from public authorities is of great importance. The high-tech strategy, aiming at the specific promotion of promising technology areas, and the six billion Euro programme of the Federal Government, which is designed to provide substantial R&D funds until 2010, have been introduced just in time. By launching this high-tech strategy, Germany followsthe international trend of developing integrated concepts for innovation policy.They look beyond the actual R&D field and even consider framework conditions.

Contact

Dr. Georg Licht,  Phone: +49/621/1235-177, E-mail: licht@zew.de

Jürgen Egeln, Phone: +49/621/1235-176, E-mail: egeln@zew.de