ABSTRACT
This chapter provides a survey of the different ways that government can encourage innovation to emphasize incentives for private sector initiatives in new research and development (R&D) activities. It proposes a federal tax credit for business R&D, an approach that in modified form was later enacted into public policy. The federal government can use a great variety of methods to influence technological invention and innovation by the private sector. These include direct support of R&D, federal procurement of goods and services, tax and credit subsidies, and more indirect mechanisms. In the industrialized nations, tax benefits are the most frequently used method of government encouragement of private-sector research, development, and innovation. The federal government makes credit available to a large array of borrowers, usually at a subsidized rate. The mechanism of federal credit does lend itself to adaptation for purposes of encouraging R&D and product innovation.
