Most OECD countries use large amounts of public funds to support activities that are intended to enhance innovation in the business sector. These funds are often used to provide direct support for private sector research and innovation. A further way of supporting private investment in innovation is through tax incentives for R & D expenditures (see Jaumotte and Pain, 2005 for a survey of the main fiscal policies to support innovation; Mohnen and Lokshin, 2009 provide a brief survey of studies evaluating R & D tax incentives). The underlying justification for public policies to support innovation is provided by the standard economic argument that otherwise the private sector would invest less in innovative activities than is socially desirable because of the public good characteristics of the R & D activity and subsequent lack of private full appropriability of R & D outcomes (Arrow, 1962; Nelson, 1959).
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