The Effect of Fiscal Incentives on Business R&D

Bucci, Valeria (2019): The Effect of Fiscal Incentives on Business R&D. Published in: International Journal of Economics, Finance and Management Sciences , Vol. 2, No. 7 (18 April 2019): pp. 37-44.

Abstract

This paper analyses the determinants of business R&D choices. In particular, it provides new empirical evidence on the effectiveness of fiscal policies aimed at driving companies to invest in R&D activity. By computing two very accurate proxies for firm-specific tax savings achievable when investing in R&D, and by exploiting exogenous changes in fiscal legislation in Italy, this study investigates if fiscal considerations affect companies’ choice to invest in R&D and how much to spend in such activity. The empirical analysis is based on an unbalanced panel data set composed of 163 Italian companies, covering the years 2004-2010. A two-step approach has been implemented, by combining a probit and a tobit estimation model. The results deliver strong empirical evidence that fiscal incentives significantly affect business R&D choices, by one side, increasing companies’ likelihood to invest in R&D, and, by the other, fostering companies’ R&D expenditure.

• Item Type: MPRA Paper
• Language: English
• Keywords: Innovation, R&D, Fiscal Incentives, Marginal Tax Savings
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O38 - Government Policy

References

[1] Romer, P. M. (1990). Endogenous Technological Change. Journal of Political Economy 98(5), S71–S102.

[2] Grossman, G. M. and E. Helpman (1991). “Innovation and Growth in the Global Economy”. Cambridge, MA: MIT Press.

[3] Arrow, K. J. “Economic welfare and the allocation of resources for invention”, in The Rate and Direction of Inventive Activity, R. R. Nelson, Eds. New York: Princeton Univ. Press, 1962.

[4] Berger, P. G. (1993). Explicit and implicit tax effects of the R&D tax credit. Journal of Accounting Research 31(2), 131–171.

[5] Hall, B. H. (2002). The financing of research and development. Oxford Review of Economic Policy 18(1), 35-51.

[6] Griffith, R., D. Sandler and J. Van Reenen (1996). Tax Incentives for R&D. Fiscal Studies 16(2), 21-44.

[7] OECD (2010). “R&D tax incentives: rationale, design, evaluation”. OECD publishing.

[8] OECD (2013). “Science, Technology and Industry Scoreboard 2013”. OECD publishing.

[9] Hu, Y., W. Ju and K. Gao (2019). The review impact of the tax policies and fiscal policies on R&D at the firm level. International Journal of Economics, Finance and Management Sciences 7(1), 1-5.

[10] Binelli, C. and A. Maffioli (2007). A Micro‐econometric Analysis of Public Support to Private R&D in Argentina. International Review of Applied Economics 21(3), 339-359.

[11] Baghana, R. and P. Mohnen (2009). Effectiveness of R&D tax incentives in small and large enterprises: analysis of firm data in Québec. Small Business Economics 33(1), 91-107.

[12] Hall, B. H. and J. Van Reenen (2000). How effective are fiscal incentives for R&D? A review of the evidence. Research Policy 29, 449–469.

[13] Mairesse, J. and P. Mohnen (2010). Using Innovation Surveys for Econometric Analysis. Handbook of the Economics of Innovation 2, 1129-1155.

[14] Hall, B. H. (1993). R&D tax policy during the eighties: success or failure? Tax Policy and the Economy 7, 1-36.

[15] Hall, B. H., F. Lotti and J. Mairesse (2009). Innovation and productivity in SMEs: Empirical evidence for Italy. Small Business Economics 33, 13-33.

[16] Cerulli, G. and B. Potì (2012). Evaluating the robustness of the effect of public subsidies on firms’ R&D: An application to Italy. Journal of Applied Economics 15(2), 287-320.

[17] Bronzini, R. and P. Paolo (2016). The impact of R&D subsidies on firm innovation. Research Policy 45(2), 442-457.

[18] Arachi, G. and V. Bucci (2019). The role of taxes in earnings management: evidence from writedowns of long-term equity investments. Finanzarchiv, forthcoming.

[19] Graham, J. R. (1996). Debt and the marginal tax rate. Journal of Financial Economics, 41(1), 41-73.

[20] Graham, J. R. (1996). Proxies for the corporate marginal tax rate. Journal of Financial Economics 42(2), 187–221.

[21] Graham, J. R. (1999). Do personal taxes affect corporate financing decisions? Journal of Public Economics, 73(2), 147-185.

[22] Shevlin, T. (1990). Estimating corporate marginal tax rates with asymmetric tax treatment of gains and losses. The Journal of the American Taxation Association 11(2), 51-67.

[23] Almus, M. and D. Czarnitzki (2003). The Effects of Public R&D Subsidies on Firm’s Innovation Activities: The Case of Eastern Germany. Journal of Business and Economic Statistics 21 (2), 226-236.

[24] Tobin, J. (1958). Estimation of the relationship for limited dependent variables. Econometrica 26(1), 24-36.

[25] Maddala, G. S. (1987). Limited dependent variables using panel data. The Journal of Human Resources 22 (3), 307-338.

[26] Schumpeter, J. (1942). “Capitalism, socialism and democracy”. New York: Harper and Row.

[27] Galbraith, J. K. (1952). “American Capitalism, the Concept of Countervailing Power”. Boston: Houghton Mifflin Company.

[28] Clausen, T. H. (2009). Do subsidies have positive impacts on R&D and innovation activities at the firm level? Structural Change and Economic Dynamics 20(4), 239–253.

[29] Bronzini, R. and E. Iachini (2011). Are Incentives for R&D Effective? Evidence from a Regression Discontinuity Approach. Banca d’Italia Working paper no. 791.

[30] Busom, I (2000). An Empirical Evaluation of the Effects of R&D Subsidies. Economics of Innovation and New Technology 9(2), 111-148.

[31] Hussinger, K. (2008). R&D and subsidies at the firm level: An application of parametric and semiparametric two-step selection models. Journal of Applied Econometrics 23(6), 729-747.

[32] Aghion, P. and P. Howitt, Endogenous Growth Theory. Cambridge, MA: MIT Press, 1998.

[33] Blundell, R., R. Griffith and J. van Reenen (1999). Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms. Review of Economic Studies 66(3), 529-554

[34] González, X., J. Jaumandreu and C. Pazó (2005). Barriers to Innovation and Subsidy Effectiveness. Rand Journal of Economics 36(4), 930-950.

[35] Takalo, T., T. Tanayama and O. Toivanen (2013). Estimating the benefits of targeted R&D subsidies. The Review of Economics and Statistics 95(1), 255-272.

[36] Wallsten, S. (2000). The effects of government – industry R&D programs on private R&D: the case of the SBIR Program. RAND Journal of Economics 31(1), 82-100.

[37] Blanes, J. W. and I. Busom (2004). Who participates in R&D subsidy programs? The case of Spanish manufacturing firms. Research Policy 33(10), 1459-1476.