Governments must favour startups over incumbents to drive innovation

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Governments must reverse policies that unduly favour incumbent companies and offer more support to startups if they are to drive innovation, according to a new report.

The report – entitled The Innovation Imperative: Contributing to Productivity, Growth and Well-Being – has been released by the Organisation for Economic Co-operation and Development (OECD), which aims to promote policies that improve economic and social well-being of people around the world.

It says young firms are crucial in driving new ideas, job creation and growth, generating many of the breakthrough technologies that drive innovation and accounting for more than 40 per cent of new jobs in OECD economies.

With this in mind, the OECD has called on governments to favour such businesses over incumbent companies that generally benefit from policies such as R&D tax credits and environmental regulations.

“This limits the growth of new firms, delays the exit of less productive businesses, and slows the reallocation of resources from less to more innovative firms,” the OECD said.

“With the digital revolution and the sharing economy changing the business landscape by allowing new ideas and business models to emerge, it is more urgent than ever to give young firms the means to experiment with new technologies and ways of doing business.”

The report also calls on policymakers to think long-term when it comes to research funding, which is suffering from cuts.

“Many of the key technologies driving growth today, including the internet, mobile telephony and genomics, would not have been possible without public funding of long-term research,” it said. “Yet this investment is now declining in many OECD countries due to fiscal consolidation and a  focus on short-term benefits. Innovation policies must look to the long term to answer challenges like climate change and ageing.”

The OECD also calls more more grants and fewer tax incentives, which it says do not meet the needs of young firms and risk amplifying cross-border tax planning by multinational firms. It also questions whether the growing use of special tax regimes for intellectual property offers value for money.

“Competitive and transparent grants are better suited to the needs of young firms, can foster co-operation in innovation, and can be directed towards areas with the most impact,” the OECD said.

Governments should also learn from experience, by monitoring and evaluating innovation policies and adjusting them over time. The OECD says this can help ensure government action is efficient and reaches its objectives at the lowest possible cost.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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