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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.

Selected highlights

Past event
IFS and the Bank of England held a conference to explore how recent developments in capital and labour markets can help to explain aggregate outcomes since the Great Recession. The conference combined microeconomic studies relevant for the UK with papers that draw lessons from other countries.
Journal article
This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data.
Journal article
We examine the "technology sourcing" hypothesis that foreign research labs located in the U.S. tap into U.S. R&D spillovers and improve home country productivity.
Journal article
We consider how influential corporate income taxes are in determining where firms choose to legally own intellectual property.
Journal article
Many writers have claimed that research and development (R&D) has two faces.
This presentation was given by Rachel Griffith as the Royal Economic Society annual lecture on 24 November 2015.


Contact IFS on 020 7291 4800 or [email protected]

Helen Miller
Deputy Director