The Incentive Effects of R&D Tax Credits: An Empirical Examination in an Emerging Economy
Posted: 2 Nov 2016
Date Written: September 30, 2016
This paper investigates whether an increase in the R&D tax credit rate stimulates firms’ incremental R&D spending. We find that the increase in the credit rate has a positive effect on the R&D spending of high-tech firms with taxable status, but does not have the same positive effect on non-high tech firms. These results indicate that tax incentives alone may not be effective to increase R&D spending if firms do not have profitable innovation opportunities. Further, we find that when the tax incentive is structured as a credit based on incremental R&D spending over a moving-average base, firms opportunistically time their R&D spending patterns to obtain additional tax credits, resulting in greater variability in R&D spending and potentially the unintended loss of tax revenues. This study contributes to the ongoing global debate about the efficacy of tax policies towards R&D by providing firm-level evidence from a large cross-section of firms in an emerging economy.
Keywords: Research and Development Expenditure, R&D Tax Credits, Tax Incentives, Emerging Economy
JEL Classification: H25, H32, O31, O38
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