Effectively financing private sector innovation? Toward a conceptual policy framework.

The article focuses on developing a conceptual framework to understand the effectiveness of financial incentives (FIs) in innovation policy, addressing a gap in linking specific FI designs to innovation goals and national contexts. It categorizes FIs into direct incentives (grants and loans) and indirect incentives (primarily tax-based), analyzing how each mitigates risks and uncertainties faced by firms of different sizes and innovation levels. The framework proposes that broad-based innovation growth is best supported by direct horizontal incentives, especially in economies with low-to-mid innovation rates or dominated by small- and medium-sized enterprises (SMEs), while a mix of direct and incremental indirect incentives may better suit economies with large, innovative firms. For targeted sectoral growth, direct targeted incentives are generally favored, with indirect targeted incentives playing a supplementary role mainly in contexts with established large firms. The paper emphasizes the need for empirical testing of these hypotheses and calls for improved data and case studies to refine understanding of FI effectiveness across diverse innovation environments.