Choosing government R&D policies: Tax incentives vs. direct funding

A major policy debate continues in many industrialized nations over the rationales for government support of technology development. This debate is unstructured due to the weakness of the underlying economics. Government intervention at any stage in the economic process is based on the recognition of market failure. In the case of technology-based markets, a rather vague allusion to excessive risk is often the best rationale put forward. Real risk/reward ratios are often distorted, leading to underinvestment, but the causes are several and vary significantly in character. As a result of this variance, the appropriate policy response also varies, ranging from varying tax incentives to direct government funding of R&D.