Foundations for Growth and Competitiveness

Targeted and sectoral policies guide economic activity by addressing specific market failures. By encouraging innovation and the development of technological capabilities, promoting energy diversification, and supporting the transition to low-carbon growth, these policies complement broader structural reforms. Their impact is the strongest when backed by horizontal policies – such as those that promote well-functioning markets and investments in human capital – helping ensure that targeted interventions translate into sustained productivity gains.

Business‑process innovations – from logistics and marketing to information systems and management – help firms stay competitive in rapidly evolving markets. Targeted innovation policies can address market failures that lead firms to under‑invest in new ideas, especially when combined with competitive markets and strong human capital. Patenting activity and business collaboration with public research institutes and universities support technological progress and knowledge diffusion, contributing to long-term growth. 

R&D tax incentives reduce the effective cost of innovation. Well‑designed schemes can generate additional R&D activity, particularly among SMEs that face tighter financing constraints. Policy stability and clear and efficient design features – such as refundability or redeemability against payroll taxes – strengthen firms’ responses and help ensure that support delivers genuine additionality, contributing to a more dynamic and innovative business sector.

Direct public support – grants, loans, guarantees, and matching schemes – can complement tax incentives, crowd in private investment, and boost innovation. Many countries have scope to expand efficient support for business R&D while evaluating and retargeting programmes to improve access, especially for smaller and younger firms.

A large share of basic research in the median OECD country is performed in higher-education institutions that are largely funded by government. Strengthening university–industry collaboration and knowledge transfer supports the commercialisation and diffusion of advanced technologies.

Higher‑education institutions play a central role in innovation systems by generating new knowledge, training highly-skilled researchers, and acting as key partners in collaborative research. Financial support and stronger links between universities and industry – through joint projects, co‑funding arrangements, and effective knowledge‑transfer mechanisms – help accelerate the development, commercialisation, and diffusion of advanced technologies. 

The size and composition of R&D personnel reflect an economy’s capacity to generate and absorb new knowledge. A strong research workforce – across researchers, technicians, and support staff – helps firms and institutions advance innovation, adopt new technologies, and sustain productivity growth. Policies that attract, retain, and develop skilled R&D staff strengthen national innovation systems and support long‑term economic performance.

Basic research generates broad knowledge spillovers that enhance the productivity of applied R&D and support future technological advances. Because these benefits are widely shared and difficult for individual firms to capture, basic research is often underfunded from a societal perspective. Well‑targeted public support can therefore strengthen overall innovation capacity, contributing to higher productivity growth.

Support for low‑carbon R&D can accelerate the development and diffusion of clean and efficient technologies. By fostering innovation and improving energy and resource efficiency, such policies can strengthen competitiveness and support long‑term, sustainable economic growth.

A growth-friendly transition relies on a coherent mix of regulation and standards whose design and implementation avoid unnecessary market burdens. To this end, product market regulations in electricity and gas are central to supporting investment.

Rapidly falling costs for renewables, alongside grid readiness, can unlock investment and innovation. Reviewing regulatory frameworks – via the introduction of one-stop shops or better grid connection rules for example – would help speed deployment.

Improving energy efficiency supports economic growth by allowing economies to produce more output with fewer resources. Improving efficiency reduces costs for firms and households, strengthens growth and competitiveness, and enhances long‑term environmental and economic sustainability.

Well‑designed restoration and conservation measures can reduce natural risks and the resulting infrastructure damage or production disruptions caused by floods, droughts or other environmental shocks. These measures can also crowd in private investment and create new opportunities in nature‑based sectors and green innovation, supporting stronger, more resilient long‑term growth.

Effective climate and environmental action requires well-designed instruments (pricing, regulation, standards) that limit undue burdens on firms. The DEEP approach assesses the market impacts of those instruments to ensure policies support growth while advancing emissions mitigation and the deployment of cleaner technologies.