The classical model of innovation sees market opportunity emerging from two different directions. The first – market pull – arises when innovative firms identify a market need and assemble the resources to satisfy it, while technology push is when technological developments generate new commercial initiatives and stimulate market demand.
In both developed and developing countries, the rationale for stimulating enterprise to invest more in R&D is that returns to the country from such investment – arising from the resultant increase in productive efficiency or new or improved products – exceeds what enterprises are able to appropriate for themselves in the form of profits.
General measures to promote enterprise investment in R&D have the advantage of being simple to administer and available to large categories of enterprises on the basis of simple criteria that require little, if any, administrative discretion. Such measures consist of various types of fiscal instruments, inter alia, tax incentives, levies, exemptions and writing-off R&D investment from income tax liabilities, accelerated depreciation and custom-duty exemptions on imported machinery and equipment, especially laboratory equipment. Another public policy instrument is the application of subsidies to stimulate R&D. Such measures as subsidized loans, loan guarantees and project grants could be particularly effective in this respect. Other measures include subsidized services or input (energy, building space) as well as duty exemptions on imported equipment and other inputs. Governments could also set up technological funds based on low-interest loans for funding R&D and related technological expenditure.
Selective measures for the stimulation of enterprise investment in R&D involve the targeting of particular industries and even firms within industries. These could include the fiscal incentives and subsidies noted above as well as preferential credit facilities, access to import licensing and other mechanisms which create rents for individual firms or industries.
Research institute activities could be refocused in a number of ways which might increase their relevance to industry, going beyond basic research. They would give increased emphasis to providing extension services to existing industries and to less technologically advanced firms within those industries – typically small and medium-sized enterprises (SMEs). These services would include "trouble-shooting", small process and product modifications, industrial engineering and design as well as other efforts aimed at adaptation and diffusion of imported technology. A number of supporting services could also become important, including, inter alia, the establishment of industrial standards, provision of quality control, certification and testing, detection of market trends and developments, assistance in the search for suppliers of inputs, partners, and R&D collaborators, training of personnel, provision of technical information, patent searches, etc.
Research fellowships for scientific and engineering personnel in industry and similar measures that encouraged mobility could serve as a channel for greater mobility of engineers and scientists. In Malaysia, for instance, the government encourages personnel from research institutes to obtain employment in the private sector, both in Malaysia and abroad and/or to set up their own firms.
Preferential support for R&D in certain sectors such as airframe construction, electronics and biotechnology has been used extensively in a number of developed and developing countries. The advantage is that it allows governments to concentrate resources on those industries, product groups or firms which show the greatest promise in terms of long-term growth prospects, financial viability and competitiveness. For example, the Republic of Korea has demonstrated that targeting of particular industries and industry groups by offering a package of promotional measures to more innovative companies with a view to developing their export capabilities can considerably accelerate the pace of technological development. In Germany, where publicly funded R&D exceeds private R&D, a proportion of public R&D is used to induce R&D in the private sector. The German system of innovation consists of a mix of general and selective measures, with the government supporting specific, mission-oriented R&D. In the USA, R&D is also subsidized heavily (either directly or indirectly), particularly in the military sector, but increasingly in industries dominated by new technologies such as those of California's "Silicon Valley".
Greater commercialization of R&D activities would help to increase the amount of financial resources available to research institutes, thereby permitting them to carry out a larger volume of work. Furthermore, it would improve their effectiveness by subjecting their work to a market test. The resulting interaction with industry would have a positive effect on various dimensions of their technological capabilities.
Possible disadvantages of general measures stem from the fact that, since they are available to broad groups of enterprises, the cost in terms of foregone tax receipts (or diverted resources in general) might be quite high. All firms would benefit equally regardless of how deserving they might be. Selective measures, in order to be effective, need to be accompanied by a system of continuous policy evaluation – an area difficult to control.