Small, not big business, needs R&D help: OECD

The global growth in investment in data, software and patents requires a new government policy approach to research and development incentives, according to a new report from the Organisation for Economic Co-operation and Development.

The OECD report, released overnight, argues tax incentives for R&D could be increasing the amount of foregone tax, without leading to a commensurate rise in innovation.

The authors argue small firms, which generated nearly half of all new jobs in the past decade among 15 OECD countries, are being placed at a competitive disadvantage to multinationals in undertaking and exploiting R&D.

“Much more needs to be done to help young firms play a greater role in driving innovation and creating jobs,” said Andrew Wyckoff, OECD director of science, technology and industry.

“They are the future of the knowledge economy and need the same chance to succeed as the major players. Improving their access to finance and making the tax rules fair for everyone is key.”

The report comes as the Coalition government reviews changes made to Australia’s R&D tax incentive by the former government.

In February the then-Labor government cut access to the incentive scheme for companies with more than $20 billion in annual turnover as part of a jobs plan more heavily focused on small business and startups.

It subsequently forecast incentive payments would be $304 million higher than expected in 2013-14, and $1.2 billion higher over the four years to 2016-17.

Prior to the election, the Coalition said it would potentially allow big business back into the R&D tax incentive, following a taxation review exploring the “effectiveness of existing taxation incentives for innovation and industry funded research”.

The OECD said firms of five years old or younger often did not generate enough profit to make use of non-refundable tax incentives, and better policies to help them would be cash refunds, carry forwards or the use of payroll withholding tax credits for R&D related wages.

The OECD analysis also suggested that well-designed direct support, such as grants and contracts, may be more effective in stimulating R&D than previously thought, especially for young firms.

The OECD also encouraged countries to review their bankruptcy laws to spur innovation, noting that reducing the stringency of these laws could raise capital flows to patenting firms by around 35 percent.

It said OECD governments must do more to implement coherent policies in the fields of privacy protection, open data access, IT infrastructure and skills.