Incentives and disincentives to invest in research and development - Essay Example

INCENTIVES AND DISINCENTIVES TO INVEST IN RESEARCH AND DEVELOPMENT (R&D) Incentives and disincentives to invest in research and development (R&D) Introduction Innovative developments constitute the factors that have influenced the rise in people’s living standards in the contemporary society. Innovative performance constitutes the critical factors that determine a nation’s progress as well as its competitiveness in the global economy. Moreover, innovative developments assist in addressing some of the challenges that companies face, which are inclusive of the idea of increasing an organisation’s revenue (Besanko et al., 2013, p. 47). However, the application of such technological developments requires the translation of scientific and technological advancements into industrious economic activities. The role of innovation for economic growth is reinforced by technological advancements, as well as the attention accorded to knowledge creation and utilization. In this case, knowledge creation depends on the success of R&D initiatives embraced by organisations in a given economy. The realisation of innovative developments can only be made possible through research and development. However, the existence of particular incentives and disincentives concerning R&D initiatives can either promote or thwart considered projects within a company, industry or a nation. Incentives and disincentives to invest in R&D projects for a firm A critical input for a firm’s success might be a derivative of its investments in R&D projects. For this reason, competition is one of the primary incentives that would influence a business to invest in R&D, which is also an essential element that can lead to the growth and profitability of a business (Atkinson & Ezell, 2014, p. 27). In this case, intellectual property rights accorded to innovative entrepreneurship provide an incentive to for the investment in innovative developments. These rights contribute to the protection of a firm’s intellectual assets, which enhances profitability and heightens the entity’s competitiveness. For instance, Gilead Sciences Inc., a pharmaceutical organisation in the United States, invested in an R&D project to develop Sovaldi (Sofosbuvir), a drug used in the treatment of Hepatitis C. This drug was introduced in the market in December 2013 (Palmer, 2015, np). The invention not only improved the profitability of the firm, but it also led to the sustainability of the firm’s competitiveness in the industry. There is a possibility of addressing market failures for R&D by influencing the incentives for a private firm. In this case, addressing issues of the appropriateness of an invention’s research results is possible by granting the inventor the monopoly over the intellectual property (Curci, 2010, p. 45). However, the disincentive of the appropriation relates to the risks and ambiguity of R&D investments. In this case, a firm can invest in an R&D project whose marginal costs of innovation can exceed the marginal income that the innovation generates (Crawford & Di, 2010, p. 63). This provision requires the availability of a market to shift such risks. For instance, Gilead Sciences Inc. called off further investment in its project since the development of the drug turned out to be less profitable than expected (The HCV Coalition, 2012, np). Incentives and disincentives to invest in R&D for industry The implementation of R&D projects for industry focuses on the creation of innovations that have direct mercantile applications (Docteur et al., 2008, p. 192). Cooperation between firms in a given industry correlates with their expenditure on innovative developments. The incentive to collaborate emanates from the greater resources available for coming up with better results. For instance, university systems encourage the collaboration between scientific faculties and the business sector to favour the utilization of scientific knowledge. For instance, university-industry collaborations in existence assist industries in implementing and developing sophisticated innovations that improve the performance of a given industry (Guimon, J. & World Bank, 2013, p. 5). However, market competition between firms in a particular industry can be a strong disincentive for the formation of collaborative initiatives, which primarily affect firms in direct competition (Docteur et al., 2008, p. 196). The disincentive emanates from the conflicting relationship between the firms in competition, which means that they cannot be able to cooperate in research activities. For instance, in relation to pharmaceutical companies, the cooperation between Gilead Sciences Inc. and another company in the development of Sovaldi (Sofosbuvir) might have affected their direct competition (Palmer, 2015, np). Such a provision might hinder the realisation of healthy competition between the firms in the industry. Incentives and disincentives to invest in R&D for a country The quality of incentives for productivity and innovation determine new business investments in rapidly developing economies and industrialised nations (CME, 2012, p. 1). For instance, investments in manufacturing facilities emanate from the need to expand the mass customization ability of an organisation, the optimisation of prototyping, the development of new products, increasing a company’s agility, and the capitalisation of the firm’s market niche (CME, 2012, p. 1). Giving tax incentives for R&D for innovation has positive economic benefit. In this case, positive economic benefits emanate from the spillover that takes place when the innovative developments extend beyond their performance to other businesses and industries in the economy (OECD, 2007, p. 5). An elemental disincentive for investing in R&D projects for a country emanates from the dissatisfaction emanating from research spending and commitment from companies operating in the country. For instance, in the United States, the tax credit for organizations that have not spent on R&D projects for a minimum of three years is reduced to a mere 6% (Delloitte, 2014, p. 12). This provision applies to companies that might be seeking research incentives from the government. Such a provision limits the exploitation of innovative developments that can assist in improving the country’s economic development. Conclusion The application of research and development results to the business platform factor in innovative approaches and entrepreneurship efforts that are essential for the creation and delivery of goods and services. Other supporting factors that improve the productivity of the business environment include the regulatory environment and the market structures available, all of which assist in the sustenance of economic growth. The innovative efforts considered, which include the formal research and development endeavours, remain indispensable to economic growth. For this reason, the incentives and disincentives of R&D projects can either promote or thwart considered projects within a company, industry or a particular country. References Atkinson, R. D., & Ezell, S. J. (2014). Innovation economics: The race for global advantage. New Haven: Yale University Press. Besanko, D., D. Dranove, M. Shanley & Schaefer, S. (2013). Economics of Strategy (6th Ed.). Hoboken, NJ: John Wiley & Sons. Canadian Manufacturers & Exporters (CME). (2012). Business Research and Development Incentives in Canada: The impact of proposed changes to Canada’s SR&ED tax credit. CME. Crawford, C. M., & Di, B. C. A. (2010). New products management. New York: McGraw-Hill Irwin. Curci, J. (2010). The protection of biodiversity and traditional knowledge in international law of intellectual property. Cambridge [U.K.: Cambridge University Press. Delloitte. (March 2014). 2014 Global Survey of R&D Tax Incentives. Delloitte. 1-85. Docteur, E., Paris, V., Moise, P., & Organisation for Economic Co-operation and Development. (2008). Pharmaceutical pricing policies in a global market. Paris: OECD. Guimon, J. & World Bank. (2013). Promoting university-industry collaborating in developing countries. The Innovation Policy Platform. OECD. (2007). Tax Incentives for Research and Development: Trends and issues. OECD. Palmer, E. (2015). Gilead Sciences. [online] FiercePharma. Available at: http://www.fiercepharma.com/special-reports/top-15-pharma-companies-2014-revenue-gilead-sciences [Accessed 30 Oct. 2015]. Read More