Prof. Pierre Mohnen will lead UNU-MERIT’s stake in WATSON – a new 1 million euro innovation project funded by the European Commission. Part of the Horizon 2020 programme, WATSON is an 18-month project involving EU research institutions and SMEs working in Fintech, financial services and economics. We caught up with Pierre to find out more.
What’s our role and who are the other partners?
The WATSON project focuses on R&D tax incentives to promote innovation in Small and Medium-sized Enterprises (SMEs). The consortium with six partner organisations is led by the SME Kapitalise Ltd (UK), and comprised of industrial partners; Exodus S.A. (Greece), Inventya Ventures (EU) Ltd (Ireland); and academic institutions; Imperial College London (UK), Maastricht University (NL) and the London School of Economics (UK). See the full press release here.
I was interested – and asked to take part – because I’ve worked on tax incentives before. I’m personally going to work on two packages. The most important is with people from Imperial College London, who are devising a new way to gauge social rates of return on R&D.
What exactly do you mean by ‘social rate of return’?
This is about rates of return not only for the one doing the R&D, but also indirect benefits for third parties. This can happen when you develop an idea that can be used by another sector or another firm. For example, in the pharmaceutical industry you come up with a new combination of drugs and that can give an idea to another company.
Spillovers can also be intersectoral. For instance, research in space exploration leads to new outfits that are lighter and more hard-wearing, which can then be produced by the textile industry. The second type of spillover involves rents. For example, when new hardware requires software to be tweaked or redesigned. In that case the software producer benefits from rent spillover, i.e. indirect benefits he gets from innovation in the hardware industry.
What is the second package you will be involved in?
That work package will look at R&D tax incentives in 12 EU countries, chosen because the project partners have some specific knowledge of them. One of the leading countries in R&D tax incentives are the Netherlands. More than half of total R&D support comes from tax incentives.
How visible are these social spillovers?
Many studies have measured the effectiveness of these programmes. The results you get depend on what you look for. If you want to know how much R&D is being generated by R&D tax incentives, then yes, the effect is generally positive. But if you also take indirect cost and benefits into account the conclusion is more nuanced. Firms, especially large firms, may be doing R&D anyway. In that case supporting them is like giving them a bonus. From a social point of view, it’s rather a waste of money.
What countries are making the best use of these incentives?
Right now the Netherlands is the best practice model for R&D tax incentives: under the Dutch system R&D performers are automatically reimbursed for tax benefits related to R&D. In other words, they pay less in social security contributions. It’s a very streamlined process compared to other countries, where you have to submit an application and everything takes much longer.
Why focus on SMEs? Can these models be used or extrapolated for developing countries?
It’s really important for SMEs because they often don’t have the means to conduct research because of financial constraints. The R&D incentives are there to partly help them on this issue. Many developing countries have introduced R&D tax incentives (albeit to varying degrees). But as ever, so much more can be achieved!
The opinions expressed here are the author’s own; they do not necessarily reflect the views of UNU.