Abstract
Against the backdrop of mediocre growth prospects in many countries, governments should do more to promote private investment in research and development (R&D). Public fiscal policies and the characteristics of wage formation are key as they affect both the incentives that firms face and their resources. This paper studies their impact at the macro level in a panel of 14 OECD countries since 1981, while we also account for the impact of unobserved common factors like the world level of knowledge. Tax incentives, government intramural expenditures on R&D, public R&D subsidies (if they are not too low nor too high) and especially investment in tertiary education, encourage business R&D investment. Wage moderation may also contribute to innovation, but only in fairly closed economies and in economies with flexible labour markets. In highly open economies with rigid labour markets, high wage pressure promotes investment in R&D. Innovation may then be the only competitive strategy for firms.
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