• Recent years have seen increased interest in the policy mix to support business R&D and innovation. This view of the policy landscape reflects a growing appreciation of the interdependence of policy measures and an understanding that the performance or behaviour of innovation systems requires the adoption of more holistic perspectives.

  • Financing is extremely important for innovation and growth, in particular at the seed and early stages of business development. Access to finance is a central issue for both innovative entrepreneurs and policy makers. Entrepreneurial start-ups and small and medium-sized enterprises (SMEs) face financial constraints largely because of their inherent riskiness and weaknesses. Evidence shows that innovative SMEs in the euro area considered access to finance one of their most pressing problems following the sovereign debt crisis in 2011 (EC, 2011a).

  • Tax incentives for R&D are often considered to have certain advantages over direct support for R&D, such as procurement of R&D or grants. As a market-based tool aimed at reducing the marginal cost of R&D activities, they allow firms to decide which R&D projects to fund. They are expected to lead to an increase in private investment in R&D and in turn to a rise in innovation outcomes and ultimately to higher long-run growth. They can also boost R&D start-up decisions. Potential downsides include 1) higher wage levels for researchers because more R&D increases demand for their skills (hence part of the government foregone revenue dilutes in rising cost instead of a volume increase) and 2) (re)location of R&D activities (tax competition between countries or between regions).

  • With lagging productivity and slow job growth, many OECD governments are looking for new sources of growth and have also recognised the importance of services in this regard. Services already account for around 70% of gross domestic product (GDP) in OECD countries. The expansion of services has largely been fuelled by globalisation and widespread use of information and communication technologies (ICTs) to provide more standardised services (health, education, government services). New market opportunities for services are also created by deregulation and privatisation of the public sector (financial, telecommunications and energy services) as well as by outsourcing of activities by manufacturing firms.

  • In spite of long-standing efforts to boost innovation performance through supply-side policies, such as public support to higher education and research, some OECD countries face a persistent innovation paradox: high or rising research and development (R&D), but low rates of innovation. Today, demand-side innovation policies – from public procurement of innovation, to standards and regulations, to lead markets and user-/consumer-driven innovation initiatives – are gaining ground in OECD countries (see policy profile on innovation policy mix for business R&D and innovation in Chapter 6). This trend reflects the adoption of a broader approach to innovation policy that addresses the full extent of the innovation system and cycle. In a context of fiscal consolidation, there is also interest in using demand-side policies to leverage innovation without creating new programmes. An additional focus is innovation to meet strong societal demand in key sectors (e.g. health, environment, energy).

  • Public support of entrepreneurship is often justified by perceived market failures that affect business creation and by the positive impact of business dynamics on economic growth and job creation. Public policies for entrepreneurship are often motivated by evidence demonstrating the impact of young innovative firms on economic growth and job creation. Policy makers also seek to address perceived market failures for start-ups, including information asymmetries and financing gaps.

  • Public research, i.e. research primarily funded with public money and carried out by public research institutions (PRIs) and research universities, plays an extremely important role in innovation systems by ensuring the provision of new knowledge. Public-sector research is considerably smaller than business research and development (R&D) in the majority of OECD countries: government intramural expenditure on R&D was on average 0.29% of gross domestic product for the OECD area in 2009, and higher education expenditure on R&D was 0.44% (including a small percentage funded by business), while business expenditure on R&D stood at 1.69%.

  • Innovation in the public sector refers to significant improvements to public administration and/or services. Drawing on definitions adopted for the business sector (Oslo Manual) and their adaptation in the Measuring Public Innovation (MEPIN) project, public-sector innovation can be defined as the implementation by a public-sector organisation of new or significantly improved operations or products.