The Dutch R&D Incentives: A Triumph for Innovation or a Lobby Success?

Abstract

One of the strategic goals defined in Lisbon in 2000 was to enhance innovation in the EU. The economic rationale for this government interference is a perceived market failure in the market for R&D activities. The idea is that without government interference the amount of R&D activities will be too low because positive spill over effects (externalities) are not included in the market price. Usually, a distinction is made between input tax incentives that reduce costs of R&D on the one hand and output tax incentives that reduce taxable R&D profits. The Netherlands applies an input tax incentive, a Research and Development (R&D) tax credit and an output tax incentive, the innovation box. The aim of these incentives is to make the Netherlands attractive for innovative companies, to attract and keep high quality employment and to promote R&D activities in the Netherlands. The underlying objective is to increase economic growth. Given the rather large impact these tax incentives have on the Dutch budget, the question arises whether these R&D incentives have been effective. That is the topic of this paper. Before going into this analysis, first a short description of the features of both tax incentives are given. Then the findings of evaluations regarding these incentives and the costs of both incentives for the government are discussed. The author also addresses critique on these incentives.