Invent now, pay later: economists urge R&D loans for businesses

6 December 2016

Andrey Sevostianov/ Alamy Stock Photo

Business loans are being proposed as a new funding system to encourage innovation and industry-university collaborations. 

Australia is urged to become the first country to offer businesses loans to fund research and development with repayment terms contingent on a company’s future profits.

Leading economists, Glenn Withers and Bruce Chapman, from the Australian National University say the loans could replace the existing system of generous tax breaks given to businesses, which cost the government about $2.95 billion in 2013-2014.

Withers and Chapman made their submission as part of a review of the R&D Tax Incentive, conducted this year. Australia is also reviewing its innovation system, and preparing a strategy until 2030 that will consider a range of policy options.

The economists say revenue contingent loans would foster industry-university collaborations and improve innovation outcomes, while enabling the government to recover and reinvest a significant proportion of taxpayer money. Under their plan, loans would be provided to businesses partnering universities for R&D activities that had been assessed by expert panels. “Businesses benefitting from the research funding would be required to repay some (or even all) of the loan, but when and only if they are in a comfortable financial situation,” they note in their submission.

The idea is modelled on Australia’s higher education contribution scheme (HECS), which Chapman helped design in the 1980s. Under HECS, the government pays tuition fees to a university and collects payment from a student’s income tax only when their salary hits a predetermined threshold.

Global R&D loan trends

While most OECD countries offer preferential tax treatment for businesses that engage in R&D activities, far fewer run national R&D loan programmes.

Italy offers subsidised loans through its Sustainable Growth Fund, Turkey offers long-term, interest-free loans through the Turkish Technology Development Foundation, and Germany offers low-interest, long-term loans to SMEs through its ERP Innovation Program, which provides finance for eligible projects up to €5 million.

The US Department of Energy runs a loan guarantee program, under which it acts as an insurer, covering up to 70% of costs for eligible projects in the event of a company defaulting. Although the programme has brought a profit for the government through interest repayments, it has been criticised for backing several failed startups incurring losses totalling US$780 million.

Chapman says major drawbacks with government-financed R&D loans are that the terms of some are too complex, requiring companies to demonstrate returns from a specific project or innovation. All of them have strict payment deadlines.

Getting past the experimental stage

Graeme Reid, a professor of Science and Research Policy at University College London says income-contingent funding for R&D is experimental. “The incentives and rewards that it generates have not been assessed rigorously,” he says.

Reid says a trial could provide insight into how R&D loans influence business behaviour, but would be difficult to evaluate and would require a long-term commitment from government: “It could take a generation to discover the effectiveness of these interventions in a robust way.”

Professor David Popp, who studies the economics of technological change at Syracuse University, says the contingent loan scheme for R&D is an interesting idea, but would have limitations: “Firms will select projects that are likely to be successful within a few years, so this won’t replace the need for direct government funding for long-term R&D needs.”

Withers suggests the contingent loan programme would complement existing competitive grant programs, should be trialled in Australia, initially in tandem with the R&D Tax Incentive, and would need to be evaluated on an ongoing basis.