Simulating the Effects of Public Funding on Research in Life Sciences: Direct Research Funds Versus Tax Incentives

Abstract

An on-going debate in the innovation policy arena revolves around the effects of public research funding. While government intervention is usually not questioned, appraising the role of direct research funds (government grants for research projects) versus tax incentives (tax exemption/deduction of research expenses) remains a core issue. In this chapter we make methodological contributions to ex-ante evaluation of these alternative government research funding instruments. Building on the SKIN model, we develop an agent-based simulation of a localized life sciences innovation system (Vienna, Austria). Companies, universities, public research and other relevant research organizations are modelled as heterogeneous agents that make investment decisions about conducting research, exchange assets with other agents and produce knowledge output. Simulation runs refer to a 30 year period, distinguishing three funding scenarios: Direct funding (no tax incentives), tax incentives (no direct funding) and the co-occurrence of both (direct funding and tax incentives). First simulation results for the Vienna life sciences innovation system suggest that the overall volume of required public funds could be lower for tax incentives than for direct funding. However, we find also indications that direct funding—in contrast to tax incentives—could have a decreasing effect on public investment per patent in the long run.