Design and Evaluation of Fiscal Incentives for Business Innovation in Latin America: Lessons Learned After 20 years of Experimentation

Abstract

This chapter presents the most important recent trends with regard to the design and evaluation of fiscal incentives for the support of business innovation in LAC. Several countries in the region have been experimenting with these policies since early 1990s, in many of these cases with technical and financial support from the Inter-American Development Bank. In contrast with the OECD countries, the LAC’s business innovation support framework is clearly biased toward direct transfers to the private sector. Just a few countries have more recently started to experiment with tax incentives. However, in comparison with the international best practices, the fiscal budgets allocated to these programs are rather meager. To some extent, business innovation policy in the region is still in its infancy. Despite this, many of these pilot programs have already been assessed and this chapter takes advantage of the existent wealth of studies in order to provide a qualitative meta-analysis of the most pioneer programs in operation since early 1990s. They main conclusions are rather straightforward: There is clear evidence of a positive impact on investments (input additionality). In other words, fiscal incentives have been effective at the moment of increasing firms’ investment in innovative projects and not only that they have been also effective in leveraging private resources for this investment. However, the studies also found that different financing mechanisms have varying impacts on different group of beneficiaries. Although it seems that the risks of crowding-out private investments are lower in the case of programs based on subsidized loans or tax incentives, matching grants seems to be more effective in the case of new innovators or at the moment of fostering linkages between firms and universities. An important policy recommendation from the different studies is that matching grants programs are a very powerful tool, which impacts might be maximized when they focus in these activities. With regard to output additionality, impacts also seem to be positive whenever enough time has elapsed since the support was approved. Indeed, the different studies that looked at output additionality suggests that positive impacts in labor productivity might be significant—in the range between 5 and 25 %—but that results start to show up only after three to five since the start of an innovation project. The chapter also indicates that the main considerations of design should be taken into consideration at the moment of increasing the efficiency of these programs and at the same time minimizing problems of moral hazard.