Think Piece

Research and Development Subsidies: A Need for WTO Disciplines?

July 2015
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At first glance, it almost seems as if governments jointly have chosen to take an attitude of benign neglect toward research and development (R&D) subsidies because they see them as unlikely to harm competition, prefer to keep their policy spaces open in this domain, or as a legitimate domestic policy intervention. This sanguine view does not really hold water, however, for a few reasons. First, it is evident that R&D subsidisation could distort trade, and cause injury to competition, depending on the volume of the support and the degree to which it facilitates final-stage market entry or expansion. Second, it is possible that competitive subsidisation races among governments could emerge, resulting in an excessive amount of R&D support relative to some welfare norm. Third, implicitly excluding R&D subsidies from international scrutiny would raise dangers of policy failure, such as mislabeling more direct subsidies as R&D support. Fourth, R&D subsidies may be used as implicit protectionism in face of macroeconomic difficulties. Each of these factors calls for some form of agreed and enforced disciplines.

More broadly, the economic stakes in this area likely will rise going forward. Countries increasingly see the development and adoption of advanced technologies as critical for growth in productivity and employment. Developing countries in particular may wish to preserve policy space for R&D subsidies, defined broadly, hoping that their use will encourage higher-value industrialisation. Another reason to anticipate increasing recourse to R&D subsidies is that countries at all development levels may wish to use them to deal with growing environmental pressures, including the need to address climate change. Thus, for example, governments may choose to subsidise adaptive R&D to assist local firms to acquire and implement international green technologies. Such policies could be painted as import-substituting interventions by firms concerned about losing export market shares. Yet another reason to expect rising activity in this area is a growing perception that particular countries, especially China, have successfully reinvigorated forms of industrial policy that have achieved targeted expansion in key industries. Included in this description are various supports, whether via direct subsidisation or market preferences, of R&D costs within domestic enterprises. Numerous developing and emerging economies seem likely to try to follow this path. A more sophisticated variant of this idea is the increasing interest in forward-looking, targeted industrial policy focused on entrepreneurial discovery and support for regional technological specialisation in dynamic market niches.

A final observation is that an important premise on which potential disciplines against R&D subsidies are based may be outdated. Specifically, the idea that governments may subsidise R&D strictly on behalf of domestic interests may hold less water in the current world of distributed research and production networks. Consider, for example, the important expansion of global innovation networks (GINs), involving R&D and related activities spread across multinational facilities within firms, sharing such costs across multiple enterprises, and involving participation of universities, public laboratories, foundations, and non-governmental organisations (NGOs). Governments, especially in emerging and developing countries, may wish to facilitate linkages between such international networks and their own firms and researchers. Doing so may require a reconsideration of multiple policies regarding market access and R&D supports. In short, the “new industrial policy” advocated by many innovation economists and policymakers, combined with internationally distributed R&D and production networks, means that traditional views of the benefits and costs of subsidies to innovation are outdated in important respects. This situation is reinforced by the growing need of countries to deploy new technologies for addressing public interest problems.

These are subtle questions, suggesting that some reconsideration of R&D subsidy disciplines is in order—the issue this brief paper addresses. It discusses the basic economics of research subsidies, noting their justifications and potential pitfalls, before overviewing existing WTO practice in this domain and points out the need for additional clarity about the nature of actionable R&D subsidies. It then offer observations on potential dissonances between WTO rules and emerging international innovation models, and goes on to offer some suggestions about modifying the Agreement on Subsidies and Countervailing Measures to deal with public R&D support that has international competitive spillover effects.

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