Investment, productivity and innovation

Long-term increases in living standards and well-being depend on sustained growth in productivity. This in turn depends on investment, including in innovation and new technologies, and the allocation of resources. IFS research has made important contributions to the understanding of how labour market institutions, product market competition, firm structure and agglomeration of activities interact with investment to drive innovation and productivity.

In an increasingly global world, it matters not only how much firms are investing and what they are investing in, but also where they are investing. IFS was home to much of the seminal work on how tax affects firm location choices. This included important work on how to measure tax incentives and how to model firm behaviour. We have been building on that ever since. For example, recent work has estimated how the location of intellectual property responds to various aspects of corporate taxes. Our current agenda is seeking to further advance understanding of what drives  where firms do their R&D by developing models of location choice that allow for complementarities between locations. This is motivated by recent research that has shown evidence for complementarities in knowledge production in different countries.

Our empirical findings and associated expertise have directly informed policy debates. For example, IFS work was central to discussions about the introduction of a UK R&D tax credit in the 2000s and the introduction and subsequent redesign of Patent Boxes in the UK and across Europe in the 2010s. We continue to comment on topical issues, such as the use of EU State Aid rules in tax cases. Our research has contributed to the understanding the UK’s productivity puzzle.