Many private firms do not undertake R&D due to the free rider problem, they would rather wait for other firms to spend money to develop better technologies then 'steal' their newly developed technology. Our government realised that less R&D is taking place so they increased funding for firms to undertake R&D because R&D has external benefits in production so successful R&D would increase productive efficiency of not just one but many firms and bring more revenue to Singapore whereas without R&D our economy would remain stagnant. The government's main duty is to look after welfare of Singaporeans and by promoting R&D it is indirectly fulfilling its responsibility.

Suggest reasons why the government has increased R&D expenditure gradually.

Because... haste makes waste... Another reason is that the government wants to establish a stable R&D sector first before it is willing to pump more money into it. This is just my opinion.

Jun Hao

ADDENDUM:

Just to add a bit to JunHao's excellent answer: Another reason why the government may be slow in increasing the amount of R&D spending is because of the indeterminate nature of the payoff. We all know that R&D produces a positive externality, but what we don't know is the magnitude of this external benefit. Furthermore, not all R&D would yield a definite benefit; some research never produce any fruits at all. This only further muddles the situation. If the government subsidises too much, it may risk an over-allocation of resources, which is equally undesirable to society as an under-allocation of resources toward R&D. Hence, the government may want to increase expenditure at a gradual pace to ensure no over-subsidising occurs.

Also, the money from the subsidies would have to come from — you guessed it — taxpayers. To fund the subsidies the government must increase the amount of tax, which creates a disincentive for people to work and invest. This would, of course, have an adverse effect on economic growth. In order to circumvent this problem, the government hence gradually increases the expenditure of subsidies as this would allow more time for the money needed to be collected without a sharp spike in tax rates.

~Nicky(:

Labels: Merit, Research and Development