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Study Notes

Competitiveness and Innovation

AS, A Level
AQA, Edexcel, OCR, IB

Why is the rate of innovation important in determining competitiveness?

There is a clear causal connection between the pace of product and process innovation within an economy and (over time) the growing prosperity of a country. Innovation drives progress and determines productivity growth which in turn drives prosperity.

Innovation requires strong human capital, institutions and incentives

Entrepreneurship is linked to the notion of creative destruction, described by the Austrian school economist Joseph Schumpeter, whereby new businesses enter the market and encourage greater competition and innovation.

Innovation can be encouraged in a number of different ways:

  • Research and Development (R&D) Tax Credits (used in Australia & South Korea)
  • Patent Box Initiative – 10% corporation tax (a UK Policy)
  • Public R&D and more Funding for Higher Education
  • Highly skilled migrants policy e.g. skilled coders
  • Nurturing an entrepreneurial culture
  • Increasing the intensity of competition within markets by deregulating / lowering the entry/exit costs

What role can fiscal policy play in stimulating innovation?

Some options for a government wanting to use fiscal policy to increase innovation within markets might include the following.

  • Subsidies which lower the cost of research for businesses
  • Tax incentives which can encourage the commercialisation of ideas (i.e. getting ideas to the market in the form of actual new products)
  • Lower employment taxes to stimulate skilled migration of key workers / entrepreneurs
  • Lower capital gains taxes encouraging small businesses / start-ups
  • Special economic zones (SEZ) to attract research-intensive businesses
  • Increased government spending in STEM subjects

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