Introduction of an ERDF funded Innovation Allowance in Saxony

Study commissioned by the Saxon State Ministry for Economic Affairs, Labour and Transport
Research and Development (R&D) is a main source of economic progress, increasing competitiveness and an important contributor to safeguarding employment. Internationally, the support of direct R&D activities is very common. Additionally, 26 (out of 34) OEDC countries and most EU member states support R&D activities via tax credits. Germany belongs to the few developed countries without any support of R&D via tax credits. The study discusses options for the introduction of a funding instrument in Saxony that is closely related to tax credits. It is shown that the support of the whole innovation process can be incorporated in an expenditure orientated funding instrument. Furthermore, the study finds many advantages of this new instrument in comparison to traditional project funding. In order to limit the fiscal costs of such a broad support of R&D, it is suggested to subsidize only additional (incremental) innovation expenditures. Even then, a significant stimulus of R&D expenditures can be expected. Furthermore, legal foundations regarding the introduction of such an innovation allowance according to the European law have been analyzed. We conclude that it is possible to introduce the funding instrument in Saxony.