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How Effective Are Fiscal Incentives for R&D? A Review of the Evidence
Abstract
This paper surveys the econometric evidence on the effectiveness of fiscal incentives for R&D. We describe the effects of tax systems in OECD countries on the user cost of R&D — the current position, changes over time and across different firms in different countries. We describe and criticize the methodologies used to evaluate the effect of the tax system on R&D behaviour and the results from different studies. In the current (imperfect) state of knowledge we conclude that a dollar in tax credit for R&D stimulates a dollar of additional R&D.
... But tax reduction affects firms' economic incentives and business strategies differently than direct funding. The main advantage of this policy strategy reported in the literature is its 'market-oriented' nature, in the sense that the government does not decide the projects to be funded (Hall and Van Reenen, 2000;Agrawal et al., 2020). Private decision-making is thus preserved, reducing allocative distortions arising from government intervention. ...
... Finally, this type of incentive tends to reduce uncertainty, favoring long-term business planning (Köhler et al., 2012;Hall, 2020). Other positive features of tax incentives vis-à-vis direct benefits are: (a) neutrality and impartiality, for tax breaks apply to all firms indistinctly, without picking off winners; (b) a lower sensitivity to shortrun political changes (Hall and Van Reenen, 2000;IFS, 2015); and (c) indirect subsidies through taxation are generally accepted in international trade agreements (OECD, 2013). ...
... The economic literature has also identified the disadvantages of the fiscal approach. The leading downside is a possible low elasticity of R&D spending with respect to the reduction of tax costs due to a possible crowding-out effect (Hall and Van Reenen, 2000), although recent empirical analyses did not find evidence of such shortcoming (Czarnitzki and Hussinger, 2018). Additionally, the tax break may not induce an increase in R&D spending if firms report other activities or expenditures as R&D, as suggested by the relabeling argument (Chen et al., 2018). ...
The objective of this paper is to discuss the role of tax incentives as part of national innovation policies from a theoretical perspective. Tax incentives are commonly interpreted as closer to a market failure rationale, but they can also play a role as part of a broad evolutionary policy strategy. The theoretical debate provides a conceptual framework to explain the increasing relevance of tax incentives in different countries as from the 2008 economic crisis. The Brazilian experience seems inconsistent with this trend, as the reduction of public budget to innovation was not followed by an upsurge of tax incentives.
... In recent years, the state has vigorously promoted the government's fiscal and tax investment in R&D. On the one hand, it has encouraged all regions and enterprises to carry out scientific and technical innovation, made up for the negative impact and loss caused by the failure of R&D, and reduced the R&D cost of private high investment to a certain extent [22]. On the other hand, a large number of inputs does not bring matching economic benefits, R&D input and output are imbalanced, and regional innovation ability cannot be improved in proportion, which is a huge challenge to improve the government R&D financial incentive policy system. ...
... The tax preference based on the perspective of R&D investment can effectively promote the R&D activities of enterprises. Hall and Reenen [22] proposed that additional R&D tax relief will bring equal proportion of innovation investment. Feng et al. [43] discussed the effect of pretax additional deduction policy based on PSM-DID method from the perspective of "input-outputincome" of innovation chain, which had a positive impact on the scale and intensity of innovation as a whole. ...
To promote the National Mid-andLong-Term Scientific and Technical Development Program, utilizing the technical innovation data from 30 provinces of China from2002–2016, this paper evaluates the inter-provincial differences of China’s regional innovation efficiency from four aspects of technical efficiency, efficiency index change, returns to scale, and projection analysis by using the DEA-Malmquist index method and constructs of the DEA-Tobit random response model to explore the impact of government funding on regional innovation efficiency. The research results show that: (1) The local development of regional innovation efficiency in China is unbalanced, and the level of pure technical efficiency restricts the improvement of innovation efficiency. (2) In the prophase of the scientific and technical development plan, technological progress has led to the growth of total factor productivity, resulting in the formation of scale effect; in the later stage, the scale return shows an overall increasing trend, and the continuous expansion of technological scale and opportunities has improved the regional innovation efficiency. (3) The R&D fiscal and tax subsidies have policy sustainability, and the direct government funding can significantly improve innovation efficiency, while the enterprises investment is opposite, and the pretax additional deduction has a negative but not significant impact. The government should give priority to direct subsidy and supplemented by tax preference, making reasonable policy allocations to expand the policy effect.
... Despite the increasing studies that have investigated the effects of R&D tax credits on enterprise innovation, there is no consensus, particularly in the context of developing and emerging economies. Most scholars consider that R&D tax credits may reduce the R&D cost, increase cash flow, stimulate innovation vitality, and thus increase R&D and innovation investment [5,10,11]. However, some scholars propose the opposite view that rent-seeking behavior may exist in the market because of the imperfect disclosure of China's information system and other reasons, which affects the effect of tax incentives. ...
... R&D tax credits promote firm innovation through the following mechanisms: Firstly, R&D tax credits indirectly alleviate financing constraints by reducing the marginal cost of R&D and innovation, and thus stimulate additional R&D and innovation investment [5,11]. Secondly, they reduce the income tax payable by enterprises and allows firms to maintain additional capital liquidity. ...
Many countries use R&D tax credits to promote firm innovation. Using the data of A-share listed companies from 2012 to 2019, we use a fixed effects model to examine the heterogeneity effect of the R&D tax credit in China on radical and incremental innovation based on the perspective of firm property rights, scale, and age under the framework of heterogeneity. The results show that the R&D tax credit significantly stimulates radical and incremental innovation, but the incentive effect on radical innovation is weak. Further heterogeneity analysis shows that the incentive effects of enterprises with different complementary resources and innovation capabilities are different. Specifically, we find that the R&D tax credit has a stronger impact on incremental innovation of state-owned enterprises and radical innovation of non-state-owned enterprises. Compared with small firms and start-ups, it has a stronger incentive effect on the radical and incremental innovation of large-, medium-sized, and incumbent firms. Finally, the results are consistent and robust using the Heckman two-step method, core indicator substitution method, and change lag period. This paper deepens the theoretical research on the heterogeneity effect of tax incentives on firm innovation, while also providing insights on how to design R&D tax credits to raise radical innovation for emerging economies.
... African countries are the most commonly evaluated countries by these previous works (Odusanya and Atanda, 2018;Gelb et al., 2013Gelb et al., , 2020Raggl, 2015;Bennell, 2021;Ramachandran, 2021;Samargandi, 2018;Mensah et al., 2018;Bassey, 2014;Nguimkeu and Okou, 2021;Alosta et al., 2021;Muhammad et al., 2021;Adegboye and Iweriebor, 2018). European countries follow African countries (Bruszt and Campos, 2016;Corsatea, 2014;Hall and Reenen, 2000;Wysmułek, 2019). Further, the most commonly examined topics are access to finance (Esho and Verhoef, 2018;Friesen and Wacker, 2013;Wang, 2016;Xu et al., 2018), corruption (Olken and Pande, 2012;Wysmułek, 2019), R&D (Adegboye and Iweriebor, 2018;Hall and Reenen, 2000;Rahmati and Pilehvari, 2019;Stojanovi c and Pu ska, 2021;Baydaş and Elma, 2021), and labour costs and efficiency (Gelb et al., 2013(Gelb et al., , 2020Samargandi, 2018;Mensah et al., 2018). ...
... European countries follow African countries (Bruszt and Campos, 2016;Corsatea, 2014;Hall and Reenen, 2000;Wysmułek, 2019). Further, the most commonly examined topics are access to finance (Esho and Verhoef, 2018;Friesen and Wacker, 2013;Wang, 2016;Xu et al., 2018), corruption (Olken and Pande, 2012;Wysmułek, 2019), R&D (Adegboye and Iweriebor, 2018;Hall and Reenen, 2000;Rahmati and Pilehvari, 2019;Stojanovi c and Pu ska, 2021;Baydaş and Elma, 2021), and labour costs and efficiency (Gelb et al., 2013(Gelb et al., , 2020Samargandi, 2018;Mensah et al., 2018). There is no study evaluating the performance of all countries by using enterprise survey data in the literature. ...
Purpose- The present study aims to provide a practical and robust assessment technique for assessing countries' investability in global supply chains to practitioners. Thus, the proposed approach can help decision-makers evaluate and select appropriate countries in the expansion process of the global supply chains and reduce risks concerning country (market) selection.
Design/methodology/approach- The present study proposes a novel decision-making approach, namely the REF-Sort technique. The proposed approach has many valuable contributions to the literature. First, it has an efficient basic algorithm and can be applied to solve highly complicated decision-making problems without requiring advanced mathematical knowledge. Besides, some characteristics differentiate REF-Sort apart from other techniques. REF-Sort employs the value or value range that reflects the most typical characteristic of the relevant class in assignment processes. The reference values in REF-Sort and center profiles are similar in this regard. On the other hand, class references can be defined as ranges in REF-Sort. Secondary values, called successors, can also be employed to assign a value to the appropriate class. REF-Sort can also determine the reference and successor values/ranges independently of the decision matrix. In addition, the proposed model is a maximally stable and consistent decision-making tool, as it is resistant to the rank reversal problem.
Findings- The current papers' findings indicate that countries have different features concerning investment. Hence, the current paper pointed out that only 22% of the 95 countries are investable, whereas 19% are risky. Thus, decision-makers should make detailed evaluations using robust, powerful, and practical decision-making tools to make more reasonable and logical decisions concerning country selection.
Originality/value- The current paper proposes a novel decision-making approach to evaluate. According to the authors' information, the proposed model has been applied to evaluate investable countries for the global supply chains for the first time.
... &D investment differs from other types of investment in two important respects: first, it is costlier to finance due to higher levels of uncertainty with regards to its returns, and second, its returns cannot be fully appropriated due to spillover effects (Arrow, 1962;Griffith et al., 1995;Griliches, 1992;B. H. Hall, 2002;B. H. Hall & Lerner, 2010;B. Hall & Van Reenen, 2000;Jones & Williams, 1998. ...
... The reported rate of increase in investment is about 1-2 per cent, amounting to onethird of the foregone government revenue (Mansfield, 1986). Hall and Van Reenen (2000) surveyed the econometric evidence on the effectiveness of fiscal incentives for R&D in several OECD countries, in particular the United States, Canada, Sweden, Australia, Japan, and France, concluding that a dollar in tax credit for R&D stimulates a dollar of additional R&D. Subsequent evidence that fiscal policy affects the level of business R&D investment has been found, among others, by Bloom et al. (2002), Guellec andVan Pottelsberghe De La Potterie (2003), Falk (2006), Wolff and Reinthaler (2008), and Thomson (2017) (see Table 1 below for an overview of the data, methods, and main findings of these studies). ...
... A value over one indicates that the incentive generates more R&D than it costs. 4 Existing studies tend to give mixed results and are not able to prove incentives efficient (Hall and van Reenen, 2000). Hansson et al. (2018) study a number of different tax incentives across several OECD countries and find that they are generally ineffective. ...
... Several researchers have focused on the design of tax incentives. Hall and Van Reenen (2000) and Lokshin and Mohnen (2010) evaluate the difference between volume-and incremental-based incentives and find the dead-weight-loss value to be greater for volume-based incentives but that incremental-based incentives lead to strategic behavior and involve high administration costs. This result is consistent with Parsons and Phillips' (2007) meta-study of the US and Canada. ...
In the report we assess this new interest for industrial policy from a Swedish and
international perspective. The various chapters in the report describes experiences
and impacts of conducting industrial policies in Sweden, UK, Germany, and
China. The chapters address different theoretical and empirical perspectives of
industrial policies.
... A value over one indicates that the incentive generates more R&D than it costs. 4 Existing studies tend to give mixed results and are not able to prove incentives efficient (Hall and van Reenen, 2000). Hansson et al. (2018) study a number of different tax incentives across several OECD countries and find that they are generally ineffective. ...
... Several researchers have focused on the design of tax incentives. Hall and Van Reenen (2000) and Lokshin and Mohnen (2010) evaluate the difference between volume-and incremental-based incentives and find the dead-weight-loss value to be greater for volume-based incentives but that incremental-based incentives lead to strategic behavior and involve high administration costs. This result is consistent with Parsons and Phillips' (2007) meta-study of the US and Canada. ...
This year Swedish Economic Forum Report examines industrial policy. Over the
20th century industrial policy has been used for promoting economic development
in both advanced industrialized countries as well as in developing countries.
However, there is no real consensus as to what industrial policy encompasses or
how effective it is for achieving economic development. In recent years, geopolitical
and geoeconomic considerations have spurred a renewed interest and advocacy
for the use of industrial policy.
... Pero si bien en el conjunto del planeta la inversión en I+D es menor de la que debiera, sí existen países en los que la cantidad de recursos destinados a I+D es más que satisfactoria. Y esta baja inversión mundial ocurre a pesar de que se ha demostrado que aquellos países más intensivos en I+D, a su vez, son aquellos que presentan mayor riqueza y tasas más rápidas de crecimiento(Mork y Yeung, 2001), lo que ha llevado a la comunidad cientí ca a reconocer la grandísima repercusión como bene cio social que tiene la inversión destinada a I+D, llevándola hasta el punto de ser considerada un bien público(Hall y Van Reenen, 2000). ...
La inversión en innovación, aunque necesaria, no alcanza las cotas deseables a nivel mundial. En el presente trabajo estudiamos los determinantes estructurales de la innovación, con el objetivo de facilitar las medidas institucionales que permitan aumentar la inversión en innovación sin consumir recursos. Analizamos el efecto de la visión cultural sobre la predisposición de un país a invertir en I+D y el efecto de la eficiencia y eficacia de un país para atraer la inversión extranjera en I+D. Nuestros resultados muestran que existe un «efecto legal» y que solo en aquellos países con una seguridad legal alta el resto de determinantes estructurales influyen. Cabe afirmar que la mentalidad abierta y a largo plazo fomenta la inversión en I+D. Asimismo, la eficiencia en innovación atrae la inversión extranjera en I+D pero, en cambio, la eficacia tiene un efecto contrario, que podría explicarse por el hecho de que las oportunidades de inversión son explotadas por los inversores nacionales. Por último, también existe un «efecto sustitutivo» de la función pública en aquellos países de baja inversión en innovación.
... The empirical literature on the effects of R&D subsidies on investment and innovation is vast. Hall and Van Reenen (2000) and Bloom et al. (2019) survey the literature. Recent works by González et al. (2005) and Arqué-Castells and Mohnen (2015) using Spanish rm data, Takalo et al. (2013Takalo et al. ( , 2022 using Finnish data, and using U.S. data, estimate structural models of rm R&D investment and use them to conduct counterfactuals on the level of subsidies. ...
This article estimates a dynamic structural model of firm R&D investment in twelve Swedish manufacturing industries and uses it to measure rates of return to R&D and to simulate the impact of trade restrictions on the investment incentives. Export market profits are a substantial source of the expected return to R&D. R&D spending is found to have a larger impact on firm productivity in the export market than in the domestic market. Counterfactual simulations show that trade restrictions lower both the expected return to R&D and R&D investment level, thus reducing an important source of the dynamic gains from trade. A 10% tariff on Swedish exports reduces the expected benefits of R&D for the median firm by 18.6% and lowers the amount of R&D spending by 7.6% in the high-tech industries. The corresponding reductions in the low-tech industries are 20.6% and 5.5%, respectively. R&D adjustments in response to export tariffs mainly occur on the intensive, rather than the extensive, margin.
... Based on the existing literature [60,61], we applied a series of variables affecting enterprise innovation, including the company's age, intangible assets, R&D expenditure intensity, asset-liability ratio, and corporate profitability. ...
Strategic emerging industries are gradually becoming the main driving force promoting the development of the national economy. As one of the strategic emerging industries, the New Generation of Information Technology Companies (NGITCs) play a crucial role in accelerating the integration of information and industrialization and in promoting the information processing of the whole society, with the support of various policy tools, such as government subsidy policy. Based on the panel data on the Chinese A-Stock Market (Shanghai and Shenzhen Stock Markets) from 2011 to 2020, this article empirically studies the correlations between the government subsidies, innovation input, and innovation output of the NGITCs. In the first step, we check the immediate effect and delayed effect of the government subsidies on the innovation output of the NGITCs and further test whether the ownership and geographical locations of the NGITCs have moderating effects between the government subsidies and innovation output of the NGITCs. In the second step, we investigate the government subsidies’ immediate impact and the delayed effect on the innovation input of the NGITCs. In the third step, we examine the innovation input’s immediate effect and the delayed effect on the innovation output of the NGITCs. In the last step, we analyze the mediating role of innovation input between government subsidies and the innovation output of the NGITCs. Our findings indicate that government subsidies positively promote the innovation output of the NGITCs and have a two-year-delayed effect. However, the government subsidies can most significantly increase the innovation output of the non-state-owned enterprises and those in the coastal areas. The government subsidies enhance the innovation input and have a three-year positive delayed effect. Innovation input positively impacts innovation output and also has a two-year-delayed effect. Our results also show that innovation input presents a partial mediating effect between government subsidies and the innovation output of the NGITCs.
... There are reviews, in the academic literature, about the effects of fiscal incentives on innovation activities that gather empirical evidence and discuss methodological issues, economic effects, and different levels of scope (firm, industry, or country) [10,11]. Similarly, recent meta-analyses have contributed to the research with specific studies of certain characteristics of tax incentives, such as direct or indirect government support and tax schemes to explain the heterogeneity in the empirical evidence developed thus far [3,12,13]. ...
Patent Box regimes are a tax relief incentive promoted by governments to encourage the R&D activities of enterprises. The literature developed on Patent Box is still examining the effects on certain economic variables. Thus, this research conducted a systematic review of the Patent Box literature since 2010 and applied regimes worldwide. For this aim, the authors developed a comprehensive systematic review using the PRISMA scheme, analyzed the main scientific characteristics with bibliometrix R-package, and prepared a summary table with the attributes collected from the Patent Box scheme applied worldwide. The findings showed that the Patent Box literature is focused on describing applications on countries and implications, analyzing its effects on company and country performance, or examining its influence on location choices. However, there is no definitive consensus on its effect on innovation or economic outcomes, which finally depends on the design of this scheme. As an applied tool, Patent Box is mainly used in European countries. This review and future updates could help as a reference monitor of the Patent Box mechanism
... With the asymmetric information between the central and local governments, it is difficult to ensure that the local governments implement the strategies set by the central government. Local officials, for political reasons, are more inclined to "short, simple, and fast" basic investments and are not inclined to long-period, risky, and externality-intensive financial expenditures on innovation, and local government subsidies for enterprise innovation have a crowding-out effect on enterprise R&D investment (Hall and Reenen 2000). ...
At present, China’s economy is transforming from rapid development to high-quality development, and environmental pollution stands out as an urgent need to be addressed. Fiscal decentralization is considered to confer economic incentives on local governments to obtain the right to gain and spend in economic growth. However, at the same time, political incentives are given to local officials under the promotion mechanism based on gross domestic product (GDP) assessment, and these two incentives become key to the environmental performance of the jurisdictions. Therefore, this paper incorporates fiscal decentralization, promotion incentives, and environmental pollution into a unified framework and theoretically analyzes the effects of fiscal decentralization, promotion incentives on environmental pollution, and the intrinsic mechanism of action. Using panel data of 30 Chinese provinces from 2002 to 2018, we examine that fiscal decentralization significantly promotes environmental pollution, and this performance is more obvious in economically underdeveloped regions. In terms of its mechanism of action, fiscal decentralization affects environmental pollution by increasing the demand for foreign direct investment, inhibiting technological progress, and enhancing environmental regulation, while foreign direct investment and technological progress significantly inhibit environmental pollution, but environmental regulation does not present a role of pollution control. Further study finds that under the consideration of “GDP-based promotion incentives,” local officials will generate “competition for investment,” relax environmental standards for FDI, and generate “competition for growth”, which will inhibit technological progress and incomplete enforcement of environmental regulations, thus exacerbating local environmental pollution. On this basis, this paper proposes to further deepen the fiscal system reform, promote the optimization of local government competition system, and effectively restrain the vicious competition behavior of local officials under the fiscal decentralization system, so as to provide relevant insights for realizing China’s economic transformation as well as high-quality economic development.
... R&D has over time evolved to be the main vehicle through which firms engage in science-based product and process innovation (Mowery, 2009;Murmann, 2003). R&D laboratories offer clear guidelines and incentives for firms to innovate, for example tax breaks (Hall & Van Reenen, 2000), a "future-oriented" space protected from short-term shareholder expectations (Reilly, Souder & Ranucci, 2016) and recognition of the value of not only exploitation, but also riskier exploration activities (McNamara & Baden-Fuller, 2007). All of these practices have in common that they reflect an understanding that experimentation and risk are inevitable when innovating, but that benefits in the case of eventual success accrue not only to the firm, but can also benefit wider society. ...
Strategic corporate social responsibility (CSR) has drawn praise for representing the "sweet spot" between communities’ needs and firms’ resources, capabilities and efforts. But what if the concept is pushed to its limits? A firm can initiate CSR projects not just to help communities, but to directly realize profit from them. In this conceptual paper, we ask how CSR is understood and functions when the intent of CSR projects is to conduct a form of research and development (R&D). The intended innovations are not science-based, but socially oriented; they seek to determine how to profitably meet the needs of poor people in developing countries. We develop our argument from conversations with managers and teaching cases that explain how executives believe CSR helps firms (learn how) to profitably serve new potential customers – whether through developing new markets or new products and services with a social purpose. Using CSR as a form of "living R&D" allows firms to make mistakes and to avoid short-term shareholder pressures. But there are very real risks to what in essence is unregulated experimentation on poor people, and we highlight some of them. Our argument highlights the ways in which such innovation and profit-oriented CSR challenge thinking on both CSR and R&D, and we make practical recommendations for how to ensure that intended beneficiaries are not harmed, but can instead benefit.
... The coefficient measuring the causal effect of interest is about 51 thousand euros, translating into a notable relative increase in innovative capital of 1.5 times higher than the 2013 average investment level. Furthermore, by relying on a back-of-the-envelope calculation, I estimate an implied elasticity of 3 -a value somewhat higher but in the range of those documented in the literature (Hall and Van Reenen 2000). In addition, the sizable increase in innovative capital is compatible with the input-additionality mechanism since I cannot accept the hypothesis that treated firms increased spending by about the size of the regional funds they received. ...
I provide novel empirical evidence on the effectiveness of public funding in lagging behind areas by investigating the effect of a subsidy program implemented in the Campania region (South Italy) and targeting SMEs. By relying on a Difference-in-Differences approach, my estimates demonstrate that the regional program produces a sizable increase in private firms’ innovative investment spending. However, I show also large heterogeneity in the firms’ response. In particular, I find that the positive effect on investment, compatible with the input-additionality hypothesis, comes from medium-large firms and low-tech medium-large enterprises. Finally, I show that the program has considerable indirect effects on medium-large low tech service firms’ labour demand but not on overall firms’ productivity.
... On the other hand, fiscal aspects are found responsible for influencing corporate TFP. In this line, Bournakis and Mallick (2018) state that a higher level of profit tax distorts productivity growth, given its impact on R&D activities (Hall and Van Reenen 2000) and on the cost of capital (Devereux and Griffith 2003). Using an unbalanced panel data of 7,400 manufacturing firms in the UK from 2004 to 2011, the authors report that corporate taxes adversely affect TFP growth. ...
We study the impact of financial performance and corporate governance on the productivity of the Romanian Research and Development (R&D) sector. We draw on a dataset consisting of 116 Romanian R&D companies covering the time span from 2007 to 2016. Firm productivity is computed using several metrics of TFP (total factor productivity). We show, based on bootstrap panel quantile regressions, that size, financial profitability, and foreign ownership are key drivers of R&D companies’ productivity. Intangible assets and taxation have no significant effect on R&D firms’ productivity, while the degree of independence in decision-making and owners’ presence in firms’ management negatively impact TFP. With women on the board, state-owned applied research institutes benefit from higher productivity compared with R&D private firms, if they are in lower quantiles.
... While several studies have been conducted at the country level (e.g., Bas & Sierra, 2002;Belderbos et al., 2017bBelderbos et al., , 2017cKumar, 2001), other studies have taken a regional perspective (Abramovsky et al., 2007;Autant-Bernard, 2006;Belderbos et al., 2014;Belderbos & Somers, 2015). Attention has been devoted to the role of the cost and abundance of local R&D manpower (Kumar, 2001), market size (Kuemmerle, 1999), intellectual property rights (IPR) (Branstetter et al., 2006;Kumar, 2001), corporate tax rate and tax incentives (Hall & Van Reenen, 2000), and government investment policies (Head et al., 1999;Mudambi & Mudambi, 2005). Other studies have taken account of the role of local technological strength (Bas & Sierra, 2002), and the strength of local universities (Belderbos et al., 2014(Belderbos et al., , 2017b(Belderbos et al., , 2017cCantwell & Piscitello, 2005;Thursby & Thursby, 2006). ...
Large, internationally connected cities are important hubs of innovative activity, yet research on the attractiveness of such ‘global’ cities for research and development (R&D) activities by multinational corporations (MNCs) is scarce. We posit that factors determining cities’ potential to attract R&D investments by MNCs differ depending on the type of R&D investments: research or development. We investigate the heterogeneous determinants of location choices for 1537 cross-border R&D investments by 633 MNCs in 55 global cities during the period 2003–12. The findings suggest that cities’ technological and university strengths are stronger attracting factors for research activities, while global cities’ market potential and intellectual property rights protection attract investments in development activities. Implications are discussed.
... 2) Policy dividends to support innovation activities have been increased. The pilot low-carbon city initiative gives pilot cities tax incentives, talents motivation mechanism, and other multiple policy dividends, which play a key role in stimulating enterprises' innovation (Hall and Reenen, 2000;Lu and Li, 2021), thereby improving the overall quality of enterprise labor. 3) Policy barriers to protect innovation achievements have been strengthened. ...
Based on the background of China's pilot low-carbon city initiative in 2010, 2012, and 2017, this article captures the exogenous change of enterprise labor structure based on A-share listed companies from 2007 to 2019 in Shenzhen and Shanghai Stock exchanges. With the integration of macro data on the city level and micro data on the enterprise level, adopting the time-varying difference-in-differences (DID) model, we found that 1) China's pilot low-carbon city initiative can significantly promote the upgrading of enterprise labor structure; 2) China's pilot low-carbon city initiative can significantly increase R&D investment of listed companies, suggesting that R&D investment is a channel for the impact of China's pilot low-carbon city initiative on enterprise labor structure in the pilot cities; 3) the heterogeneity analysis shows that the labor structure of the state-owned listed companies has been optimized significantly, while the labor structure of the non–state-owned listed companies is not significant. Meanwhile, the labor structure of the listed companies under high-quality government control has been optimized significantly, while the labor structure of the listed companies under low-quality government control is not significant. Overall, our study shows that the pilot low-carbon city initiative has played a governance role in China and optimized enterprise labor structure.
... Second, we add to the discussion on how government can influence private innovation via increasing private demand. The majority of the literature focuses on supply-side government policies (e.g., tax incentives) that change the cost of R&D investment (Agrawal et al., 2020;Akcigit et al., 2018;Bloom et al., 2002;Chen et al., 2021;Einiö, 2014;Guceri and Liu, 2019;Hall and Van Reenen, 2000;Lokshin and Mohnen, 2013;Rao, 2016), while less evidence exists on the effectiveness of policies affecting demand. 2 Based on our estimation results, we calculate the implied elasticity of R&D investment with respect to increase in sales to be between 0.86 -1.05, depending on the specification. As a comparison, the estimated elasticity of R&D investment with respect to policy-induced changes in the tax component of the user cost of capital ranges from 0.14 in the short-run to 2.7 in the long-run (Bloom et al., 2002;Hall, 1993). ...
... Ela (2019) ise Türkiye'de Ar-Ge'ye yönelik vergi teşviklerinin yenilik çıktısı üzerinde etkin olduğunu göstermektedir. Pek çok çalışmadan elde edilen sonuçlar, kamu Ar-Ge sübvansiyonlarının firma tarafından finanse edilen Ar-Ge'yi teşvik etme eğiliminde olduğunu göstermektedir (Hall ve Van Reenen, 2000;Lach, 2002;Aerts ve Czarnitzki, 2004;Czarnitzki ve Hussinger, 2004;Ali-Yrkkö, 2005;Koga, 2005;Czarnitzki ve Licht, 2006;Clausen, 2007;Aerts ve Schmidt, 2008;Hussinger, 2008;Aschhoff, 2009;Aristeia vd., 2017). ...
Bu çalışmada Türkiye’de faaliyet gösteren firmaların kamu kurumlarından aldığı Ar-Ge teşviklerinin firma yenilik performansına etkisi olup olmadığı araştırılmaya çalışılmıştır. Çalışmada Dünya Bankası tarafından 2015 yılı için Girişim Anketi ile toplanan Türkiye’ye ait 6006 firma verisi kullanılmaktadır. Bağımlı değişken olarak firmaların ürün, süreç, pazarlama, tedarik ve organizasyonel yeniliklerinin toplamı olarak gösterilen yenilik yapma ikili değişkeni kullanılmıştır. Kamu teşviklerinin yanı sıra tam zamanlı çalışan sayısının, firma yaşının, ihracat, firma büyüklüğü, yönetici deneyimi ve yönetici mezuniyetinin yenilik üzerindeki etkileri incelenmiştir. Sadece firmaların kamu hibesi alıp almamalarının değil, hibe miktarı ve hibeyi veren kurumun hangisi olduğunun da yenilik yapma olasılığını arttırdığı sonucuna ulaşılmıştır.
... In the present context, the proliferation of additional policy tools does not seem useful, or even viable. As shown by the literature, policies supporting innovation are effective when they are not short-term policies, and when the size of individual incentives is not very small (Hall and Van Reenen, 2000;Lundvall et al., 2002;Izushi, 2003;Rodrik, 2004). Therefore, particularly in times of crisis, it is useful not to put the limited funds in many different programmes, focussing instead to a few strategic objectives. ...
... Some research policy instruments applied by governments to the financing of research are tax credits that reduce the marginal costs of R&D and direct grants that raise the private marginal rate of return. Hall and van Reenen (2000) show that tax credits to firms have a 'crowding out' effect on industrial research if the prices of the other inputs linked to R&D increase, since they favour projects that generate high profits in the short-run to the detriment of projects with high social rates of return. On the contrary, public grants to research projects offer high marginal social rates of return. ...
... However, if R&D subsidies are only provided through direct grants, negative effects on firms' R&D outputs can show. As an administrative ex-ante subsidy, direct R&D grants may miss the intended goal to encourage innovation output due to the misalignments of interest and information asymmetries (Guan & Yam, 2015;Hall & Van Reenen, 2000;Jourdan & Kivleniece, 2017). More specifically, firms in nature are profit seekers while governments concern more about the social welfare. ...
R&D subsidized loans (tiexi daikuan) is an effective market-driven solution to promote firms’ R&D outputs, including patent applications and new product sales, in China. However, empirical examination on the effects of subsidized loans is insufficient. Using a panel data of manufacturing firms of Jiangsu Province from 2010 to 2014, the study investigates the effects of R&D subsidized loans on firms’ R&D outputs in comparison to that of the direct R&D grants. The results show that R&D subsidized loan recipients significantly outperform those who only receive direct grants in terms of new product sales. Meanwhile, subsidized loans inhibit the recipients’ exploratory patent applications and discourage R&D activities with higher risks. This study contributes to R&D subsidy literature and extends the knowledge in the roles of different types of public sponsorships on firms’ innovation.
Bu çalışmada, kamu tarafından sunulan destek ve teşviklerden yararlanan firmaların yapısı ile bu firmaların ölçek, net satış ve ihracat açısından destek almayanlara göre performans farklılaşması betimsel olarak incelenmiştir. Bu amaçla, Sanayi ve Teknoloji Bakanlığı tarafından oluşturulan Girişimci Bilgi Sistemi çerçevesinde yer alan farklı veri setlerinin birleştirilmesi ile elde edilen özel bir veri seti kullanılmıştır. Analiz sonuçları, 2008-2018 yılları arasında KOSGEB, TÜBİTAK ve Sanayi ve Teknoloji Bakanlığı desteklerinden yararlanma oranının oldukça düşük olduğunu, bilgi ve iletişim sektörü ile imalat ve mesleki, teknik ve bilimsel faaliyetler sektörlerinin genele göre daha fazla yararlanma oranına sahip olduğunu göstermiştir. Model tahmin sonuçları kamu desteklerinden faydalanan ve faydalanmayan girişimlerin performans farklılaşmasını ortaya koymaktadır. Girişimler arasındaki farklılaşmanın performans ve destek türüne göre de değiştiği görülmüştür. En belirgin performans farklılaşması yatırım teşviklerde görülürken, en az farklılaşma TÜBİTAK desteklerinde gözlenmiştir. Bu çalışmanın amacının Türkiye’de uygulanan desteklerden faydalanan firmaların özelliklerini ortaya koymak olduğu ve yapılan analizlerin etki analizi şeklinde yorumlanmaması gerektiği vurgulanmalıdır.
Research resources in a given scientific domain may spill over into other close scientific disciplines, thereby improving performance. Using bibliometric data from the SCImago database drawn from a sample of 174 countries, we implement a measure of proximity-based on revealed comparative advantage (RCA) as a specialization or activity index. Our estimates show that proximity between disciplines positively and significantly related to the publication growth rate.
In this chapter, we first clarify the research question addressed in this book, “Why is development of new technologies and new businesses continued for a long period of time under a high level of uncertainty?” and explain a background that we selected the history of reverse osmosis membrane development as our research target. We next propose the framework for our analysis, which focuses on four types of uncertainty associated with innovation processes: technological uncertainty, customer uncertainty, competition, uncertainty, and social and organizational uncertainty. We also discuss that breakthrough technologies, initial market, policy support, and company-specific rationales play important roles in dealing with these uncertainties. At the end of this chapter, we explain the overall structure of this book.
Over the last decade, Europe has decided to make innovation one of its top priorities. New emerging technologies and an understanding of innovative processes encourage the greater competitiveness of companies. Moreover, technological progress and the process of research and development (R&D) for the purpose of innovation are influenced by the political and business environment. To stimulate such activities, governments use two main types of policies: direct and indirect financial support. Direct financial support includes fiscal (or tax) incentives and financial support, such as grants, loans, and subsidies, while indirect financial support includes state aid. Various national factors determine countries’ preferences regarding direct or indirect financial support or other instruments to encourage innovation and entrepreneurship. Countries like Croatia are facing transition and privatization problems. Therefore, investments and activities in R&D are extremely important. As a result, R&D will increase economic efficiency and long-term economic growth. The objective of this paper is to present the existing practice and analyze the effects of government support in the public and private sectors to stimulate innovation and entrepreneurship in Croatia. Moreover, the paper will provide proposals for improvements based on the analysis to remove obstacles to stimulating innovation and entrepreneurship.
Governments around the world have been trying to encourage domestic innovation and entrepreneurship as an important means for reducing the unemployment rate, enhancing gross domestic product (GDP) growth, and deepening the knowledge-based economy. Government policies to promote innovation and entrepreneurship include both tax and non-tax incentives. Nevertheless, many governments often use only tax incentives and do not pay sufficient attention to non-tax incentives. Furthermore, some governments limit the incentives to post startup stages without considering the pre-startup stage. Such an approach raises a question about the appropriate mix of government incentives for stimulating innovation and entrepreneurship. To answer this question, this chapter aims to identify and examine the proper mix of tax and non-tax incentives that capture various stages of the process of innovation and entrepreneurship development. The chapter employs qualitative research methods to analyze archival data and primary data (obtained from a focus group study of experts from academia, industry, and government). The government incentives are matched with each stage of the innovation and entrepreneurship development process, taking the specific nature of each stage into account. In the pre-startup/ideation stage, more weights should be given to non-tax incentives to build the entrepreneur/innovator capacities through training and helping them to access various business services to launch a new business. In the startup or conversion stage, both tax and non-tax incentives are important, requiring a combination of incentives that reduce the costs of launching a new business, access to finance and providing preferential tax treatment to venture capital/crowd funding and implementing patent box. In the scale-up/diffusion stage, more weight should be given to tax incentives to minimize the tax burden on innovation and entrepreneurship. This include implementing a reduced tax rate or giving tax exemption for a limited period. In addition, the chapter also recommends granting research and development (hereafter R&D) tax incentives in all stages and taxing the labor income of scientists and engineers at a reduced rate.
Considering the influence of new energy vehicle enterprises innovation input is affected by a variety of non-linear and uncertain factors, an automatic coding machine mixed with RBF neural network model is presented in this paper, and the Gaussian distribution of training data optimization method and the Gaussian transfer function training module are put forward to make innovation input higher prediction precision and stronger universality. By comparing the prediction data of the proposed model with that of the traditional neural network model, the accuracy of the improved model is verified. Therefore, the proposed model can provide theoretical basis and decision support for technological innovation decision-making of new energy vehicle enterprises.
This paper demonstrates, theoretically and empirically, that firms’ research and development (R&D) efforts and investors’ analyses of their prospects are mutually reinforcing. Entrepreneurs attempt more research when financiers are better informed about projects’ profitability because they expect financiers to provide more funding to successful projects. Conversely, financiers collect more information about projects when entrepreneurs undertake more R&D because the opportunity cost of missing out on successful projects is then higher. Two natural experiments confirm that this interaction occurs and suggest that it contributes to about one third of the total effect of a policy designed to stimulate R&D. Overall, the analysis suggests that policies aimed at promoting R&D – such as research subsidies or tax breaks – have a multiplier effect owing to the induced improvement in capital efficiency. As a result, those policies can be rendered more effective by coupling them with other policies designed to increase capital efficiency. The feedback effect that we document also helps explaining why innovative ecosystems such as that in the Silicon Valley are challenging to set up.
In the past two decades, China has implemented various industrial policies involving all aspects of national economic development. At the same time, the number of patent applications in China has rapidly grown to become the largest in the world. Is industrial policy the one force of China’s patent explosion? We investigate the influence of industrial policy on firm innovation outputs using data from the text of Five-Year Plan and Chinese listed firms during 2008 to 2020. Based on the negative binomial regression model, we find that industrial policy has a positive effect on the number of patent applications. Further tests show the varying relationship between industrial policy and firm innovation with industry heterogeneity. We also find that industrial policy increases the number of patent applications by easing financing constraints and strengthening competition. Conclusion of this study provides corresponding theory and decision basis for the implementation of industrial policy in emerging markets.
This paper predicts the future adoption of Connected Autonomous Truck (CAT) among freight transportation organizations by incorporating the distance decay function-based phenomenon of peer effects into an integrated choice and latent variable model (ICLV). We surveyed 400 freight transportation organizations operating within the United States to capture their preferences and perceptions towards adopting level-3 CATs. By analyzing the responses, we are able to generate a prediction for how quickly freight transportation organizations will choose to test and adopt CATs. Through ICLV, the authors captured the impact of organizations' optimistic attitudes towards their inclination to adopt CATs. The results showed that organizations with an optimistic attitude towards CATs, having members advocating CATs and nationwide coverage, are more likely to adopt CATs. In contrast, organizations with an average trip length of regular trucks of >500 miles are more likely to reject CATs. The peer effect results imply that the future adoption rate of level-3 CATs will be doubled (29%) or quadrupled (57%) from 13% based on the different peer effect coefficient values varying from 0.70 to 0.90. This study will provide key takeaways and policy inputs to planners, policymakers, and researchers to frame and implement plans to bolster the organizational adoption of innovations like autonomous technology.
The purpose of this study is to investigate the efficiency of smart farm facilities of insect business entities. A questionnaire was conducted to investigate the actual conditions of smart farm edible insect business entities. A survey of 500 edible insect farms, all of which raised insects within 7 years of establishment, was conducted, and all of them raised insects in smart farm facilities. First, after dividing the smart farm into three levels, efficiency was measured. In particular, efficiency was analysed by distinguishing cases of possessing capital and those of receiving support from the government. The results confirmed that receiving government subsidies is more efficient than using own capital. The most significant finding is that if a business entity has a large amount of its own capital and receives government subsidies, efficiency decreases. In other words, when allocating government subsidies, the efficiency of those subsidies can be improved by first identifying the status of existing capital.
R&D incentives are a popular policy option to encourage private R&D worldwide. This paper provides an updated survey of R&D incentives’ effect on private R&D investment, including evaluations from developing countries. It assesses the pattern of R&D incentives, and reviews recent literature on the efficacy of these incentives. It reveals that R&D incentives generally increase private R&D, but to a varying extent depending on incentive types, countries’ income levels, industry and firm characteristics, and the design and implementation of the incentives. Overall, variability of the effect on private R&D is greater for direct incentives than indirect incentives. The effect of indirect incentives is found to be smaller in developing countries than developed countries, contrary to the predictions of growth theory. This paper investigates the potential reasons for these findings and summarizes policy implications for governments considering upgrading or adopting R&D incentives.
Innovation is central to long-run economic growth. This chapter summarizes the state of the literature on the economics of innovation, highlighting open policy questions. We first articulate the key market failures in markets for innovation, and then discuss how both scientific norms and market-oriented policies help overcome those market failures. We close by discussing recent work on the diffusion of inventions as well as on the links between innovation and inequality.
Introduction. Analysis of indicators reflecting the research and development sector financing and their performance assessment demonstrated the need to improve the extrabudgetary fund-raising mechanisms for the domestic research and development sector, due to a significant gap between Russia and the leading countries of the world in this area. Methods. The assessment was carried out using the algorithm developed by the authors on the basis of a variety of regulatory legal acts of the Government of the Russian Federation. The regulatory elaboration coefficients calculation of extrabudgetary fund-raising mechanisms based on an integral scoring assessment provided for identifying the most effective and ineffective tools. The study was carried out using comparative analysis, economic and mathematical methods in the comparative analysis of countries and indicators, deductive and inductive analysis of the scientific literature on the topic under study, as well as using the generally accepted principles of statistical analysis and a systematic approach to the analysis of the issues involved, using analogy and aggregation of the obtained results. Results and Discussion. High dependence of R&D financing on budget allocations and scarcity of applicable mechanisms was revealed, inter alia, due to the insufficient development of the range of tools in a number of cases. The key risks and impediments to extrabudgetary fund-raising for the research and development sector: the mismatch of the mechanisms with the R&D life cycle and the low demand for scientific results by the real sector of the economy. We worded eight specific proposals to improve the extrabudgetary fund-raising and accounting mechanisms that make it possible to expand the range of tools used. Conclusion. The results of the study can be taken into account for when laying out approaches to developing the accounting mechanisms of extrabudgetary fund-raising sources in the R&D sector within the ongoing activities in government programs and projects aimed at the scientific and technological development of the Russian Federation, as well as for new extrabudgetary fund-raising mechanisms for the research and development sector.
The aim of this study is to reveal the relationship between the support provided for research and development (R&D) within the scope of the investment incentive system and innovation registration on the basis of spatial differences, taking into account regional development differences. In this direction, an empirical evaluation is made to reveal whether the level of incentives provided for R&D and the level of innovation in Turkey on the basis of 81 provinces differ in the context of socio-economic development level. As a result of the analysis, it is seen that 81 provinces are divided into five clusters.
We study the optimal design of corporate taxation and R&D policies as a dynamic mechanism design problem with spillovers. Firms have heterogeneous research productivity, and that research productivity is private information. There are non‐internalized technological spillovers across firms, but the asymmetric information prevents the government from correcting them in the first best way. We highlight that key parameters for the optimal policies are (i) the relative complementarities between observable R&D investments, unobservable R&D inputs, and firm research productivity, (ii) the dispersion and persistence of firms' research productivities, and (iii) the magnitude of technological spillovers across firms. We estimate our model using firm‐level data matched to patent data and quantify the optimal policies. In the data, high research productivity firms get disproportionately higher returns to R&D investments than lower productivity firms. Very simple innovation policies, such as linear corporate taxes combined with a nonlinear R&D subsidy—which provides lower marginal subsidies at higher R&D levels—can do almost as well as the unrestricted optimal policies. Our formulas and theoretical and numerical methods are more broadly applicable to the provision of firm incentives in dynamic settings with asymmetric information and spillovers, and to firm taxation more generally.
El Informe, de 800 páginas, da cumplimiento a la Resolución de creación del Comité, conforme a la que la futura reforma tributaria debe adecuarse a la realidad económica del siglo XXI y garantizar un sistema tributario “más equitativo, progresivo, justo y que incorpore la imposición medioambiental, digital y la perspectiva de género”. Se trata, con ello, de “sentar las bases para una reforma tributaria estructural a medio y largo plazo que modernice y aumente la eficiencia del sistema tributario de nuestro país”. En suma, el objetivo del Libro Blanco es servir de fundamento para una reforma del sistema tributario que garantice la sostenibilidad de las finanzas públicas, de manera que pueda responder a la financiación de los gastos públicos, contribuyendo a reducir el déficit estructural y al mantenimiento del Estado de Bienestar.
There are large primary literatures that evaluate the effectiveness of either R&D tax credits or R&D subsidies in promoting private R&D. However, this Meta-Regression Analysis, by investigating these literatures jointly, is the first study that systematically measures and compares the effectiveness of these two policy instruments. After controlling for publication selection and sources of heterogeneity, we find that both tax credits and subsidies induce additional private R&D and that neither instrument systematically outperforms the other. However, whereas subsidy effects are increasing over time tax credit effects are not. Although their respective effects are “small”, they are not negligible: in round terms, an additional $1 of public R&D support of either type induces 7.5 cents of additional private R&D expenditure. Sources of heterogeneity in the reported effects include: tax credits are most effectively delivered as “incremental” schemes, are more effective in economies with a balanced “policy-mix” regime, and are generally less effective for micro firms and SMEs than for large firms; while subsidies are more effective for manufacturing firms, although not for high-tech firms, and are more effective than tax credits in economies predominantly using subsidies. Finally, we argue for the importance of statistical power in the design of evaluation studies.
This study examines whether and how firms adjust their accounting conservatism in response to government support through industrial policies, which reduce firms’ dependence on external financing from the capital market. Based on China’s unique economic programme called ‘Five-Year Plan’ from 1991 to 2015, we observe a decline in accounting conservatism among firms covered by government industrial policies. The decline is more pronounced in covered firms, which face higher ex-ante financial constraints, and in the subsample of firms which receive higher government support. These findings are robust to alternative specifications of accounting conservatism and policy timing. Our evidence implies that government industrial policies can have unintended consequences for corporate financial reporting.
This paper takes the China high- and new-technology enterprise (HNTE) program implemented in 2008 as a quasi-natural experiment. Difference-in-differences (DID) estimate with matching data from the China Industrial Enterprise Database, the China Customs Database and the HNTE Certification Database for 2006–2010 is used to study the impact of HNTE certification on enterprises’ export product quality. The results show that, overall, HNTE certification promotes the upgrading of export product quality. Moreover, the improvement of innovation ability brought by HNTE certification is an important channel to promote such upgrades. A series of robustness tests also confirm the above conclusions. In addition, heterogeneity analyses are conducted based on the enterprise size, ownership and trade mode, respectively. The results show that the mechanism by which HNTE certification policy promotes export product quality through the improvement of enterprise innovation ability is more significant in non-SOEs and general trading enterprises.
In this study, we use panel data to analyse the impact of an R&D tax credit on R&D personnel, particularly the impact on Ph.D. holders allocation, comparing low R&D intensity firms with medium-high and high R&D intensity firms. The results show that, in medium-high and high R&D intensity firms, the R&D tax credit had a significant impact on allocating Ph.D. holders in firms after 3 years of participation in the tax incentive scheme. We use a database covering 7,710 firms that performed R&D at least once in Portugal over the 23-year period 1995 to 2017, provided by the official business R&D survey data and a database of firms that applied for tax credit incentives at least once in the same period. Based on the estimation of impulse-response functions by local projections, we assess the impact of introducing the tax incentive scheme for corporate R&D in firms from different R&D intensity sectors.
Based on 21,653 innovative firms from 61 non-U.S. economies, we find a positive relationship between a firm's innovativeness and cash holdings. This relationship is stronger after the implementation of patent boxes that provide preferential tax treatment for patent income. Moreover, innovative multinationals facing higher repatriation taxes accumulate higher total cash holdings. The positive innovativeness-cash relationship varies with institutional environments and is more pronounced in countries with higher R&D tax credits, less developed financial markets, better governance, stronger shareholder rights, more technicians, better infrastructure, greater investment freedom, and in industries with fiercer competition and longer innovation cycles. Innovative firms with higher cash holdings invest more in R&D and generate more patents. Overall, our findings provide insights into the driving forces underlying the large cash accumulation in innovative firms worldwide.
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Successful tax incentive interventions rely on effective programme design, yet designing an effective programme is highly challenging. We draw on the policy design and tax incentive literature to shed light on how two policy design choices – the nature and targeting of the incentive - shape the innovation effectiveness of a high- and new-technology enterprise tax incentive programme in China. We first find evidence that, on average, the programme can stimulate increases in firm R&D and patenting. Not all firms benefit equally, however. Second, we find that firms with larger incentives experience greater innovation impacts, but that high incentive values may crowd out R&D. We also find multiyear incentives to be effective for stimulating firm innovation in all years, but only in the initial years for R&D. Finally, for targeting, following a ‘picking winners’ strategy may enhance programme effectiveness as we find stronger innovation impacts for firms with greater programme experience, certification likelihood, and innovation experience. Our study contributes by helping resolve the theoretical ambiguity about how policy design choices about tax incentives' value, duration, and targeting can impact innovation effectiveness, by providing insights on the effectiveness and heterogeneity of the innovation impacts of tax incentives in emerging economies, and by providing more explicit guidance on how to design tax incentive programmes to raise R&D and innovation.
R&D; tax policy in the United States during the 1980s is evaluated, with particular emphasis placed on quantifying the impact of the R&D; tax credit on the R&D; investment of manufacturing firms. Using publicly available data on R&D; spending at the firm level, I estimate an average tax price elasticity for R&D; spending which is in the neighborhood of unity in the short run. Although the effective credit rate is small (less than five percent until 1990), this relatively strong price response means that the amount of additional R&D; spending thus induced was greater than the cost in foregone tax revenue. The recent evolution of features of the U.S. corporate tax system which affect R&D; is also reviewed and my results are compared with those of previous researchers. The conclusion is that the R&D; tax credit seems to have had the intended effect, although it took several years for firms to fully adjust. I also argue that although the high correlation over time of R&D; spending at the firm level makes it difficult to estimate long-run effects precisely, the same high correlation makes it probable that these effects are large.
Certain themes and findings emerge from the authors analysis of key relationships between research and development (R&D) and other factors. Among them: (1) R&D capital and the structure of production: (a) R&D capital facilitates the mapping of technological possibilities into economic opportunities. (b) R&D takes time to accumulate and uses up scarce resources. The adjustment process from project initiation to product and process development typically takes three to five years. (c) The marginal adjustment costs for R&D are higher than for plant and equipment. (d) R&D capital is a complement to physical capital but is a substitute for labor in the long run. (e) Output changes exert a much stronger influence on R&D capital than vice versa. (2) R&D capital and market structure: the value of cost-reducing R&D is determined by its profitability. Since private returns from R&D understate true social returns from such investments, R&D will be underprovided. And since R&D investments often represent large fixed costs, market structures in R&D intensive industries is going to be concentrated. This situation is, however, not unique to R&D. What is unique about R&D is the nature of spillovers. These spillovers reduce industry costs, but since they result in inappropriability of returns from the R&D performer, incentives to do R&D are reduced. Restoring appropriability does not help matters either because it results in industrial concentration, incorrect pricing of R&D, and higher social costs. Perfect appropriability may also result inexcessive R&D because too many firms may be fishing for the same information. The information asymmetry between an R&D performer and a financier distinguished R&D investment from traditional risky investment. It is in the interest of the R&D performer to keep vital project information secret. But in the absence of detailed information, project financing may not be forthcoming. Asymmetric information also limits the R&D firm's ability to profit from its output. Success breeds success. Since learning involves costs, successful firms possess an advantage over their rivals in enjoying greater possibilities for success. So, monopoly persists in the R&D capital market. Past successes from R&D investments lead to greater current R&D efforts by successful firms. These firms tend thereby to produce further innovations and thus widen the gap between themselves and their rivals. Much R&D capital is concentrated in large firms, but it is more likely that they have become large because of their R&D successes than that they do more and more fruitful R&D because they are large. (3) Public policy and R&D investment: (a) Most industrial nations see the need to intervene through the tax code to encourage R&D activities. Empirical evidence on the effectiveness of such initiatives is limited. (b) An analysis of parameter estimates for a cost function of the Canadian industries suggests that R&D tax credits had a significant positive impact on R&D investment in Canada. For every dollar of revenue foregone for the national treasury, $1.80 worth of additional R&D investment was undertaken. This suggests that properly designed tax incentives can further public policy objectives cost-effectively.
R&D Tax policy in the United States during the nineteen-eighties is evaluated. with particular emphasis placed on quantifying the impact of the R&D tax credit on the R&D investment of manufacturing firms. Using publicly available data on R&D spending at the firm level, I estimate an average price elasticity for R&D spending which is in the neighborhood of unity in the short run. Although the effective credit rate is small (less than five percent until 1990), this relatively strong price response means that the amount of additional R&D spending thus induced was greater than the cost in foregone tax revenue. The recent evolution of features of the U.S. corporate tax system which affect R&D is also reviewed and my results are compared with those of previous researchers. The conclusion is that R&D tax credit seems to have had the intended effect, although it took several years for firms to fully adjust. I also argue that although high correlation over time of R&D spending at the firm level makes it difficult to estimate long run effects precisely, the same high correlation makes it probable that these effects are large.
R&D investment is an outcome of a corporate plan and is influenced by the exisintg technology, by prices, by product demand characteristics, and by the legacy of past capital stock decisions. In this paper we focus on the determinants and interaction of labor, physical capital and R&D. In particular, we investigate three major issues. The first relates to the nature of the factor substitution possibilities between the three inputs in response to changes in input pricees and estimate the own and cross once elasticities of the factors of production. The second problem pertains to the magnitude of which output expansion (or what may be considered the same thing, product demand growth) increases labor, physical, and R&D capital. Finally, we address the extent to which adjustment costs affect factor demands, and measure the magnitude of these costs for physical and R&D capital.
Many studies measure capital stocks and effective tax rates for different industries, but they consider only tangible assets such as equipment, structures, inventories, and land. Some of these studies also have estimated that the welfare cost of tax differences among these assets under prior law is about $10 billion per year or 13 percent of all corporate income tax revenue. Since the investment tax credit was available only for equipment, its repeal raises the effective rate of taxation of equipment toward that of other assets and virtually eliminates this welfare cost. However, firms also own intangible assets such as trademarks, copyrights, patents, a good reputation, or general production expertise. This paper provides alternative measures of the intangible capital stock, and it investigates implications for distortions caused by taxes. The existence of intangible capital markedly alters welfare cost calculations. Investments in advertising and R&D are expensed, so the effective rate of tax on these assets is less than that on equipment under prior law. With large differences between these assets and other tangible assets, we find that the welfare cost measure under prior law increases to $13 billion per year. Repeal of the investment credit taxes equipment more like other tangible assets but less like intangible assets. The welfare cost still falls, to about $7 billion per year, but it is no longer "virtually eliminated." With additional sources of intangible capital, credit repeal could actually increase welfare costs. Finally, however, the Tax Reform Act of 1986 not only repeals the investment tax credit but reduces rates as well. Efficiency always increases in this model because the taxation of tangible assets is reduced toward that of intangible assets.
Cette étude semble constituer une des premières tentatives pour évaluer les effets des crédits d'impôts consentis par le Canada sur la recherche et le développement commandités par les entreprises. Les résultats obtenus sont fondés sur un échantillon soigneusement choisi de firmes effectuant de la recherche et du développement au Canada, sur une étude économétrique des données sur la recherche et le développement industriels au Canada, et sur d'autres calculs impliquant l'élasticité aux prix de la demande pour la recherche et le développement; ils révèlent que les avantages fiscaux n'ont eu que peu d'effets. Les allocations spéciales pour recherche et développement semblent avoir fait augmenter les dépenses de R & D d'environ 1 pour cent. et le crédit d'impôt à l'investissement semble les avoir fait augmenter d'environ 2 pour cent. Or, de telles augmentations sont équivalentes à environ 30 pour cent ou 40 pour cent du manque à gagner du gouvernement. /// This study seems to be one of the first attempts to estimate the effects of Canada's R and D tax credits and allowances on company-funded research and development. The results (based on a carefully selected survey of firms carrying out R and D in Canada, an econometric study of Canadian industrial R and D data, and other calculations involving the price elasticity of demand for R and D) indicate that these effects have been modest. The special research allowance seems to have increased R and D expenditures by about 1 per cent, and the investment tax credit seems to have increased them by about 2 per cent. These increases amounted to about 30 or 40 per cent of the revenue losses to the government.
The Value and Performance o f U. S. Corporations THE VALUE OF A CORPORATION is known from hour to hour in the stock market. The performance of a corporation, from the shareholders' perspective , is measured by the corporation's ability to pay dividends, now and in the indefinite future. Our research investigates the relation between value and performance. We use modern finance theory as a benchmark for valuation. Finance theory holds that, on average, the current value of a share is the discounted value of the future dividends the share earns. The theory is explicit about the discount rate. If, on average , over firms and over time, shares sell for less than the discounted value of the dividends the shares ultimately pay, it means that the stock market undervalues those shares; investors require a higher rate of return than theory suggests they should. Our motivation for this research is the persistent criticism that Ameri-can capitalism, with its focus on stock prices determined by myopic investors , diverts managers from efficient, long-term investments toward the style of management most pleasing to the stock market. We ask if certain managerial decisions or firm characteristics result in stock prices that are higher or lower than the benchmark provided by finance theory. Is the market systematically shortsighted with respect to all activities, placing too little value on deferred payoffs? Did this problem worsen We are grateful to Chris Hall for assistance and to the Econometrics Laboratory at University of California, Berkeley, for massive computations. This research was supported in part by the National Science Foundation. We benefited enormously from the comments of the discussants and others at the Brookings Panel meeting.
The U.S. government has long included in its tax code various special provisions designed to stimulate industrial R&D. In 1981, those provisions were substantially augmented by a special R&D tax credit, and various proposals are now under consideration to relax the antitrust statutes in order to encourage research through joint ventures. The case for any of these measures is difficult to establish, being based on assumptions that are not readily tested in objective terms. Nevertheless, one point is fairly clear: As between stimulating industrial R&D by individual firms and stimulating R&D joint ventures of such firms, the joint venture approach appears superior in its likely results.
The Economic Recovery and Tax Act of 1981 provided a 25 percent tax credit for increases in research and experimentation expenditures. Previous studies have shown considerable controversy about the effectiveness of various tax credits. This study focuses on the response of the strategic groups in the pharmaceutical industry to the credit. Four strategic groups were formed using different levels of research intensity (research/sales) and relative cash flow margin (cash flow/sales). The change in research intensity following enactment of the tax credit was estimated. The analysis found that the tax credit caused an increase in R&D expenditures. In addition, the R&D tax credit appears to have contributed to increased competitive R&D spending among the firms in the pharmaceutical industry.
In this paper the effectiveness of an R&D levy/grant system is considered. It is shown that in theory such a scheme can lead to increases in R&D and/or correct sub-optimal allocations to R&D in a free market economy. Operation of such a system is compared with that of a tax based incentive scheme taking account of the experience of the UK with regard to a levy/grant system used to stimulate training.
The effectiveness of the tax credit for research and experimentation (R&E) expenditures is examined using a panel of firm data for the period 1975 through 1988. Using a structural model, the results generally indicate that the credit resulted in increased R&E spending. However, the effect of the credit was substantially mitigated by the impacts of net operating loss carryovers and low growth opportunities. Results also indicate some degree of decreased R&E spending as a result of debt restructuring activity. Tax policy implications are discussed.
A number of market failures have been associated with R&D investments and significant amounts of public money have been spent on programs to stimulate innovative activities. In this paper, we review some recent microeconometric studies evaluating effects of government-sponsored commercial R&D. We pay particular attention to the conceptual problems involved. Neither the firms receiving support, nor those not applying, constitute random samples. Furthermore, those not receiving support may be affected by the programs due to spillover effects which often are the main justification for R&D subsidies. Constructing a valid control group under these circumstances is challenging, and we relate our discussion to recent advances in econometric methods for evaluation studies based on non-experimental data. We also discuss some analytical questions, beyond these estimation problems, that need to be addressed in order to assess whether R&D support schemes can be justified. For instance, what are the implications of firms' R&D investments being complementary to each other, and to what extent are potential R&D spillovers internalized in the market?
As more and more emphasis is being given to the role of government in supporting innovation-related activity, a clearer understanding of the historical intent of R&D-related tax policies (by far the most common mechanism for support of R&D) and of the effectiveness of these policies appears warranted. The purpose of this paper is threefold. First, it provides an overview of the history of R&D-related tax policies, both in the USA and in twenty-two other industrial countries. Second, it reviews the extant empirical evidence on the effectiveness of R&D tax credits. And third, it offers a critique of R&D tax policies per se.
The focus of this paper is an analysis of the production structure, the demand for factor inputs, and the rates of return in the manufacturing sector of three major industrialized countries, the United States, Japan and Germany. The analysis is based on a dynamic factor demand model with two variable inputs, labor and materials, and two quasi-fixed inputs, capital and R&D. Adjustment costs are explicitly specified. The demand equations are derived from an intertemporal cost-minimization problem formulated in discrete time. The adopted estimation methodology allows for non-separability in the quasi-fixed factors. The model is estimated using data from 1965–1966 to 1977–1978. Particular attention is given to the role of R&D. For all countries the rate of return on R&D is found to be higher than that of capital. Their respective magnitudes are similar across countries. Considerable differences in the input demand elasticities with respect to output and prices are observed; also, for all countries the speed of adjustment for capital is found to be higher than that for R&D.
Since 1981, U.S. firms have been allowed to claim a tax credit for R&D spending in excess of some base amount. This paper assesses the evidence gathered to date about the effectiveness of the R&D tax credit in the United States.There is considerable evidence that the R&D tax credit has had some effect on the behavior of American firms in the early 1980s. But it is not as yet clear how much of the initial response of firms to the credit is due to increases in total R&D as opposed to increases in R&D that is qualified for the R&D credit.Moreover, different empirical approaches produce substantially different estimates of the size of the effect of the R&D credit. Analyses based on time series data imply that the credit has had a substantial effect on R&D spending. However, indirect evidence based on estimates of the price elasticity of demand for R&D, as well as studies based on more direct evidence from survey data and corporate tax returns imply that the effect of the credit has been rather modest.There are several ways in which these divergent estimates of the size of firms' responses can be reconciled. However, each suggested reconciliation points toward using the more modest estimates to gauge the effects of a permanently enacted incentive for R&D. These estimates imply that had the incremental 25 percent R&D credit been made permanent, it would have stimulated between $0.35 and $0.93 of additional company-funded R&D spending per each $1 of tax revenue forgone.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
This paper examines the impact of fiscal incentives on the level of R&D investment. An econometric model of R&D investment is estimated using a new panel of data on tax changes and R&D spending in nine OECD countries over a nineteen year period (1979-1997). We find evidence that tax incentives are effective in increasing R&D intensity. This is true even after allowing for permanent country specific characteristics, world macro shocks and other policy influences. We estimate that a 10 per cent fall in the cost of R&D stimulates just over a 1 per cent rise in the level of R&D in the short-run; and just under a 10 per cent rise in R&D in the long-run.
Taxationâboth corporate and personalâhas been held responsible for the low investment and productivity growth rates experienced in the West during the last decade. This book, a comparative study of the taxation of income from capital in the United States, the United Kingdom, Sweden, and West Germany, establishes for the first time a common framework for analysis that permits accurate comparison of tax systems.
This paper analyzes the effects of the U.S. tax treatment of the R&D activities of American multinationals. Recent evidence indicates that the level of R&D spending is highly sensitive to its after-tax cost. The U.S. Tax Reform Act of 1986 reduced the tax deductions that many American firms can claim for their R&D expenses incurred in the U.S., and on this basis, observers predicted that American firms would react to the tax change by significantly increasing the fraction of their R&D that they perform abroad. Aggregate data indicate that this fraction instead stayed roughly constant, at around 10%. An important reason why U.S. firms did not move more of their total R&D activity offshore is that U.S. tax law provides quite generous treatment of R&D performed in the U.S. for use abroad by firms with excess foreign tax credits, and the Tax Reform Act of 1986 significantly increased the number of American firms with excess foreign tax credits. Hence, the 1986 tax change increased the cost of U.S.-based R&D for some American firms, and reduced it for others, with little impact on the overall fraction of R&D spending that U.S. firms do abroad. One consequence of the tax law changes of the late 1980s is that, by 1991, the tax treatment of foreign-source royalties received by American firms with excess foreign tax credits has five times the revenue impact of the Research and Experimentation Tax Credit.
This paper explores the effect of recent U.S. tax changes on the R&D activities of American multinational corporations. Prior to 1986, U.S. multinational firms could deduct all of their domestic R&D expenses against their U.S. income for tax purposes. After 1986, some firms could take only a partial deduction (while other multinationals continued to receive the benefits of 100% deductibility). By comparing the behavior of firms in these two situations (after 1986), it is possible to estimate the responsiveness of R&D to changes in after-tax prices. The results indicate that the price elasticity of demand for R&D lies between -1.2 and -1.6, thereby implying considerably more price sensitivity than is typically assumed to be true of R&D. Based on these results, the 1986 tax change appears to have been responsible for a reduction of between $1.4 billion and $2.2 billion in annual R&D in the United States, in return for $1.2 billion in additional annual tax revenue.
A long-standing concern surrounding the performance of the UK economy is its perceived failure to maintain the same technological pace as its competitors. Industrial research and development (R&D) expenditure as a proportion of GDP fell during the 1980s at a time when all other G7 countries increased the proportion of their output given over to R&D. This ratio is now lower in the UK than in most other G7 countries. If this world-wide trend toward more R&D indicates that industrial production is becoming increasingly science-based, then the UK may be in danger of becoming a relatively low-tech economy. One purpose of this article is to examine whether there is a rational basis for these fears.
This study examines the effectiveness of R&D tax incentives using an unbalanced panel of 434 Canadian firms. Not all firms in the sample are R&D performers. A B-index summarizing the various tax incentives for R&D is constructed for each firm, taking into account individual ceilings in the use of relevant tax incentives. A generalized Tobit model with fixed effects is estimated. A one percent increase in the federal tax credit of R&D yields an average of $0.98 additional R&D expenditure per dollar of tax revenues foregone.
In Canada, as in many other countries that have adopted R&D tax credits and allowances, there has been considerable controversy over their effectiveness in increasing company-financed research and development. This study seems to be one of the first systematic attempts to estimate the effects of Canada's R&D tax credits and allowances. The results present a very consistent picture. The survey results, the econometric results, and some simple calculations based on rough measures of the price elasticity of demand for R&D all suggest that the special research allowance increased R&D expenditures by about 1 percent and that the investment tax credit increased them by about 2 percent. These increases seem to be appreciably less than the revenue losses to the government.
This paper is an attempt to assess the contribution of R&D to growth of output in U.S. manufacturing industries. The important issues to address are: whether the slower growth of R&D expenditures in recent years has been the cause of slowdown in the growth of productivity, and what the factors are in explaining the slower growth of R&D expenditures. After a brief survey of the major issues on this topic, a production function is formulated and estimated using tine series cross-section data for the manufacturing industries. Also, the factors determining the rate of growth of R&D expenditures in the 1958-75 period are identified by formulating a dynamic model of demand for R & D activity. The estimation results indicate that the stock of R & D, as a measure of stock of knowledge, positively and strongly affect growth of output in total manufacturing, total durable, and total nondurable industries. Potential growth of output is affected because of the slowdown of growth of stock of R&D since 1966, but the gross rates of return on stock of R&D have not changed much in the 1966-75 period. Growth of output, changes in relative prices, cyclical fluctuations of the economy, as well as changes in level of employment and capital stocks are the factors affecting R&D expenditures. The effect of government financing of R&D on private decisions regarding R & D expenditures differs among different industries. By and large, the results on this issue are basically inconclusive and require further investigation.
On sait que le rendement industriel est influencé par les investissements en recherche et développement. En conséquence, les pays occidentaux industralisés, dont le Canada, cherchent à stimuler les dépenses de recherche et de développement par le moyen d'incitations fiscales offertes à l'industrie. L'auteur de cet article a voulu évaluer les effets directs et indirects des incitations fiscales sur les dépenses de recherche et de développement au moyen d'une étude économétrique de la production et des investissements d'entreprises canadiennes. Les résultats montrent qu'en l'absence de croissance économique, le crédit d'impôt pour investissements de recherche et de développement et les allocations spéciales se soldent par 0,80 $ de dépenses additionnelles en R&D pour chaque dollar d'impôts auquel renonce le gouvernement. Si la production économique augmente, les dépenses supplémentaires au titre de la recherche et du développement dépassent les coûts encourus par le gouvernement. En outre, le crédit fiscal pour immobilisations industrielles est un incitatif indirect qui provoque une augmentation des dépenses de R&D pouvant atteindre environ 10 pour cent de l'augmentation obtenue per les incitations directes. /// Industrial performance is influenced by the rate of investment in research and development (R&D). Western developed countries, and Canada in particular, have attempted to stimulate industrial R&D expenditures through the use of tax incentives. The purpose of this paper is to estimate the effects of both direct and indirect tax incentives on R&D expenditures. The results are based on an econometric study of production and investment of Canadian firms. The results show that when there is no growth in the economy the R&D investment tax credit and special allowance generate about $.80 of additional R&D expenditures per dollar of foregone tax revenues to the government. When ouput expands, the additional R&D expenditures increase by more than the dollar cost to the government. In addition, the business fixed investment tax credit is an indirect incentive which causes R&D expenditures to increase by about 10 per cent of the increase obtained for the direct incentives.
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