Abstract
This paper studies the effect of R&D tax incentives on the research activity of manufacturing firms based in France, Italy, Spain and the UK, over the period 2007–2009. Using a matching procedure, we show that, in all the examined countries but Spain, R&D tax incentives induced a statistically significant increase in the intensity of R&D expenses over sales. However, this effect is driven only by the behaviour of small firms. By assessing the benefit-cost ratio of R&D tax policies, we find evidence of substantial additional effects in Italy and the UK.
Similar content being viewed by others
Notes
Industry-level evidence for the USA indicates that fiscal incentives to R&D have an impact on aggregate output growth well beyond their positive effect on R&D engagement (Minniti and Venturini 2017a). Minniti and Venturini (2017b) document that, in the USA, this impact is channelled by a faster rate of TFP growth, induced by the R&D tax policy, which is stronger for firms far from the technology frontier.
Assessment of the “output additionality” of R&D consists in checking whether tax incentives do stimulate innovation outputs, such as patents and product innovations. Examples of these studies are Czarnitzki et al. (2011), Cappelen et al. (2012), Bozio et al. (2014), Bodas Freitas et al. (2017), Bösenberg and Egger (2017).
Albeit earlier works based on structural models indicate that the demand for R&D is not very sensitive to changes in R&D tax price, the latest evidence seems more supportive. Parsons and Phillips (2007) and CPB et al. (2014) survey the wide micro-econometric literature concluding that the demand elasticity of R&D to its tax price ranges from 1 and 2% in the long run and between 0.20–0.30% in the short run. Similar findings are obtained by Bloom and Griffith (2002) using country-level data.
For the sake of simplicity, we neglect the presence of other special fiscal allowances for R&D outlays.
The database was collected within the European Firms in a Global Economy (EFIGE) project, supported by the Directorate General Research of the European Commission through its 7th Framework Programme. The original sample was identified along three dimensions of stratification: industries (11 NACE-CLIO industry codes), regions (at the NUTS-1 level of aggregation) and size classes (10–19; 20–49; 50–250; more than 250 employees).
In spite of the well-known fact that small firms do not carry out (or do not report) formal R&D activities, the share of small companies on total R&D performing firms ranges from 62 to 63% in France and the UK and to 73–74% in Spain and Italy. SMEs represent a large majority of the total sample, ranging between 88.6% in France to 93% in the UK.
As a robustness check, we also employed a nearest neighbour matching (NNM) procedure, with NN = 1 (with replacement) and the imposition of a common support. The results, available from the authors upon request, are consistent with those achieved with the kernel algorithm. However, according to the usual covariate balancing tests, the quality of the matching turns out to be lower than that yielded by the kernel procedure (see Table 13 in the “Appendix” section).
Large firms represent a handful of companies in the working sample and hence are grouped together with medium-sized firms.
Table 13 in the “Appendix” section reports common joint significant tests of the balancing properties of the covariates (i.e. the firms’ characteristics included in the probit regressions) arising from the kernel matching. For all country and size sub-sample, all the joint tests indicate a good quality of the matching. In fact, after the matching, the mean bias in the covariates (i.e. the mean of the absolute differences between the treated and untreated sub-samples) is remarkably lower; the likelihood ratio (LR) test rejects the hypothesis of joint significance of the covariates. Similarly, the pseudo-R2 approaching to zero suggests a successful matching.
Moreover, testing the additionality of R&D fiscal incentives for Spanish firms seems redundant because the estimated effect of such incentives is not statistically significant (cf. Table 5).
References
Aghion, P., Askenazy, P., Berman, N., Cette, G., & Eymard, L. (2012). Credit constraints and the cyclicality of R&D investment: evidence from France. Journal of the European Economic Association, 10(5), 1001–1024. https://doi.org/10.1111/j.1542-4774.2012.01093.x.
Agrawal, A. Rosell, C., & Simcoe, T.S. (2014). Do tax credits affect R&D expenditures by small firms? Evidence from Canada. NBER Working Papers 20615. https://doi.org/10.3386/w20615.
Altomonte, C., & Aquilante, T. (2012). The EU-EFIGE/Bruegel-unicredit dataset. Bruegel Working Paper 2012/13.
Andrews, D., Criscuolo, C. & Gal, P.N. (2015). Frontier firms, technology diffusion and public policy: microevidence from OECD countries. OECD Productivity Working Papers No. 2, OECD, Paris.
Appelt, S., Bajgar, M., Criscuolo, C., & Galindo-Rueda, F. (2016). R&D tax incentives: evidence on design, incidence and impact. OECD Science, Technology and Industry Policy Papers No. 32, OECD Publishing, Paris.
Aristei, D., Sterlacchini, A., & Venturini, F. (2017). Effectiveness of R&D subsidies during the crisis: firm-level evidence across EU countries. Economics of Innovation and New Technology, 26(6), 554–573. https://doi.org/10.1080/10438599.2016.1249543.
Baghana, R., & Mohnen, P. (2009). Effectiveness of R&D tax incentives in small and large enterprises in Québec. Small Business Economics, 33, 91–107. https://doi.org/10.1007/s11187-009-9180-z.
Becker, B. (2015). Public R&D policies and private R&D investment: a survey of the empirical evidence. Journal of Economic Surveys, 29(65), 917–942. https://doi.org/10.1111/joes.12074.
Bloom N., Griffith, R., & Van Reenen J. (2002). Do R&D tax credits work? Evidence from a panel of countries 1979–1997. Journal of Public Economics, 85 (1), 1–31. doi: https://doi.org/10.1016/S0047-2727(01)00086-X
Bloom, N., Schankerman, M., & Van Reenen, J. (2013). Identifying technology spillovers and product market rivalry. Econometrica, 81(4), 1347–1393. https://doi.org/10.3982/ECTA9466.
Bodas Freitas, I., Castellacci, F., Fontana, R., Malerba, F., & Vezzulli, A. (2017). Sectors and the additionality effects of R&D tax credits: A cross-country microeconometric analysis. Research Policy, 46(1), 57–72. https://doi.org/10.1016/j.respol.2016.10.002.
Bösenberg, S., & Egger, P. H. (2017). R&D tax incentives and the emergence and trade of ideas. Economic Policy, 32(89), 39–80. https://doi.org/10.1093/epolic/eiw017.
Bozio, A., Irac D.,& Py, P. (2014). Impact of research tax credit on R&D and innovation: evidence from the 2008 French reform. Document de Travail n. 532, Banque de France, Direction Générale des Études et de Relations Internationales.
Brown, J. R., Fazzari, S. M., & Petersen, B. C. (2009). Financing innovation and growth: Cash flow, external equity, and the 1990s R&D Boom. Journal of Finance, 64(1), 151–185. https://doi.org/10.1111/j.1540-6261.2008.01431.x.
Brown, J. R., Martinsson, B., & Petersen, B. C. (2012). Do financing constraints matter for R&D? European Economic Review, 56(8), 1512–1529. https://doi.org/10.1016/j.euroecorev.2012.07.007.
Busom, I., Corchuelo, B., & Martínez-Ros, E. (2017). Participation inertia in R&D tax incentive and subsidy programs. Small Business Economics, 48, 153–177. https://doi.org/10.1007/s11187-016-9770-5.
Caiumi, A. (2011). The Evaluation of the effectiveness of tax expenditures—a novel approach: an application to the regional tax incentives for business investments in Italy, OECD Taxation Working Papers, No. 5, OECD Publishing, Paris. https://doi.org/10.1787/5kg3h0trjmr8-en.
Caliendo, M., & Kopeinig, S. (2008). Some practical guidance for the implementation of Propensity Score Matching. Journal of Economic Surveys, 22, 31–72. https://doi.org/10.1111/j.1467-6419.2007.00527.x.
Cantabene C.&. Nascia, L. (2014). The race for R&D subsidies: evaluating the effectiveness of tax credits in Italy. Economia e Politica Industriale, 3, 133–158. doi: https://doi.org/10.3280/POLI2014-003006.
Cappelen, Å., Raknerud, A., & Rybalka, M. (2012). The effects of R&D tax credits on patenting and innovations. Research Policy, 41(2), 334–345. https://doi.org/10.1016/j.respol.2011.10.001.
Castellacci, F., & Mee Lie, C. (2015). Do the effects of R&D tax credits vary across industries? A meta-regression analysis. Research Policy, 44(4), 819–832. https://doi.org/10.1016/j.respol.2015.01.010.
Corchuelo, M. B., & Martínez-Ros, E. (2010). Who benefit from R&D tax policy? Cuadernos de Economía y Dirección de la Empresa, 45, 145–170.
CPB, CASE, ETLA & IHS (2014). A study on R&D tax incentives: final report. European Commission, DG TAXUD, Taxation Papers n. 52.
Czarnitzki, D. (2006). Research and development in small and medium-sized enterprises: the role of financial constraints and public funding. Scottish Journal of Political Economy, 53(3), 335–357. https://doi.org/10.1111/j.1467-9485.2006.00383.x.
Czarnitzki, D., & Hottenrott, H. (2011). R&D investment and financing constraints of small and medium-sized firms. Small Business Economics, 36(1), 65–83. https://doi.org/10.1007/s11187-009-9189-3.
Czarnitzki, D., Hanel, P., & Rosa, J. M. (2011). Evaluating the impact of tax credits on innovation: a microeconometric study on Canadian firms. Research Policy, 40, 217–229. https://doi.org/10.1016/j.respol.2010.09.017.
David, P. A., Hall, B. H., & Toole, A. A. (2000). Is public R&D a complement or substitute for private R&D? A review of the econometric evidence. Research Policy, 29(4–5), 497–529. https://doi.org/10.1016/S0048-7333(99)00087-6.
Decheleprêtre, A., Einiö, E., Martin, R., Nguyen, K-T., & Van Reenen, J. (2016). Do tax incentives for research increase firm innovation? An RD design for R&D. CEP Discussion Paper no. 1413 (revised June 2016).
Duguet, E. (2012). The effect of the incremental R&D tax credit on the private funding of R&D an econometric evaluation on French firm level data. Revue d'Économie Politique, 122(3), 405–435. https://doi.org/10.3917/redp.223.0405.
Fernandez de Guevara, J., Rincon-Aznar, A., & Venturini, F. (2017). R&D tax incentives, distance to frontier, TFP growth in Europe. Mimeo: University of Perugia.
Fowkes, R.K, Sousa, J., & Duncan, N. (2015). Evaluation of research and development tax credit. HMRC Working Paper No. 17.
Gemmell, N., Kneller, R., McGowan, D., & Sanz, I. (2017). Corporate taxation and productivity catch-up: evidence from European firms. Scandinavian Journal of Economics, forthcoming. https://doi.org/10.1111/sjoe.12212.
Gorodnichenko, Y., & Schnitzer, M. (2013). Financial constraints and innovation: why poor countries don’t catch up? Journal of the European Economic Association, 11(5), 1115–1152. https://doi.org/10.1111/jeea.12033.
Guceri, I. (2017). Will the real R&D employees please stand up? Effects of tax breaks on firm-level outcomes. International Tax and Public Finance, forthcoming. https://doi.org/10.1007/s10797-017-9438-3.
Guceri, I., & Liu, L. (2015). Effectiveness of fiscal incentives for R&D: quasi-experimental evidence, University of Oxford, Centre for Business Taxation.
Hall, R. E., & Jorgenson, D. (1967). Tax policy and investment behavior. American Economic Review, 57, 391–414.
Hall, B., & Van Reenen, J. (2000). How effective are fiscal incentives for R&D? A review of the evidence. Research Policy, 29(4–5), 449–469. https://doi.org/10.1016/S0048-7333(99)00085-2.
Hall, B., Lotti, F., & Mairesse, J. (2009). Innovation and productivity in SMEs: Empirical evidence for Italy. Small Business Economics, 33(1), 13–33. https://doi.org/10.1007/s11187-009-9184-8.
HM Revenue & Customs (2015). Research and development tax credits statistics,. report released on 11 September 2015 Downloadable at www.gov.uk/government/collections/corporate-tax-research-and-development-tax-credits.
Ientile, D., & Mairesse, J. (2009). A policy to boost R&D: does the R&D tax credit work? EIB Papers, 14(1), 144–169.
Kerr, W. R., & Nanda, R. (2015). Financing innovation. Annual Review of Financial Economics, 7, 445–462. https://doi.org/10.1146/annurev-financial-111914-041825.
Kobayashi, Y. (2014). Effects of R&D tax credits for SMEs in Japan: a microeconometric analysis focused on liquidity constraints. Small Business Economics, 42, 311–327. https://doi.org/10.1007/s11187-013-9477-9.
Labeaga, J. M., Martinex-Ros, E. & Mohnen, P. (2014). Tax incentives and firm size: effects on private R&D investment in Spain. UNU-Merit Working Paper Series, # 2014–081.
Lokshin, B., & Mohnen, P. (2012). How effective are level-based R&D tax credits? Evidence for the Netherlands. Applied Economics, 44, 1527–1538. https://doi.org/10.1080/00036846.2010.543083.
Maskus, K. E., Neumann, R., & Seidel, T. (2012). How national and international financial development affect industrial R&D. European Economic Review, 56(1), 72–83. https://doi.org/10.1016/j.euroecorev.2011.06.002.
Mazzucato, M., & Semieniuk, G. (2017). Public financing of innovation: new questions. Oxford Review of Economic Policy, 33(1), 24–48.
MESR (Ministère de l'Éducation nationale, de l’Enseignement Supérieur et de la Recherche) (2011 and 2012). Le crédit d’impôt recherche en 2009 et en 2010. Rapports au Parlement sur le CIR 2009 et 2010. Downloadable at www.enseignementsup-recherche.gouv.fr.
Minniti, A., & Venturini, F. (2017a). The long-run growth effects of R&D policy. Research Policy, 46(1), 316–326. https://doi.org/10.1016/j.respol.2016.11.006.
Minniti, A., & Venturini, F. (2017b). R&D policy, productivity growth and distance to frontier. Economics Letters, 156(1), 92–94. https://doi.org/10.1016/j.econlet.2017.04.005.
Mukherjee, A., Singh, M., & Žaldokas, A. (2017). Do corporate taxes hinder innovation? Journal of Financial Economics, 124(1), 195–221. https://doi.org/10.1016/j.jfineco.2017.01.004.
Mulkay, B., & Mairesse, J. (2013). The R&D tax credit in France: assessment and ex-ante evaluation of the 2008 reform. Oxford Economic Papers, 65(3), 746–766. https://doi.org/10.1093/oep/gpt019.
Negassi, S., & Sattin, J-F. (2014). Evaluation of public R&D policy: a meta-regression analysis. University of Delaware, Department of Economics Working paper NO. 2014–2009.
Neicu, D., Teirlink, P., & Kelchtermans, S. (2016). Dipping in the policy mix: do R&D subsidies foster behavioral additionality effects of R&D tax credits? Economics of Innovation and New Technology, 25(3), 218–239. https://doi.org/10.1080/10438599.2015.1076192.
OECD (2012). Innovation in the crisis and beyond. In OECD Science, Technology and Industry Outlook (Chapter 1). OECD: Paris.
OECD (2017). R&D Tax Incentives Indicators: country profiles. http://www.oecd.org/sti/rd-tax-stats.htm#countries.
Parsons, M.. & Phillips, N. (2007). An evaluation of the federal tax credit for scientific research and experimental development, Department of Finance (Canada), working paper 2007–2008.
Rao, N. (2016). Do tax credits stimulate R&D spending? The effect of the R&D tax credit in its first decade. Journal of Public Economics, 140, 1–12. https://doi.org/10.1016/j.jpubeco.2016.05.003.
Romero-Jordán, D., Delgado-Rodríguez, M. J., Álvarez-Ayuso, I., & de Lucas-Santos, S. (2014). Assessment of the public tools used to promote R&D investment in Spanish SMEs. Small Business Economics, 43(4), 959–976. https://doi.org/10.1007/s11187-014-9575-3.
Thomson, R. (2013). Measures of R&D tax incentives for OECD countries. Review of Economics and Institutions, 4(3). https://doi.org/10.5202/rei.v4i3.144.
Warda, J. (2001). Measuring the value of R&D tax treatment in OECD countries. STU review no. 27: special issue on new science and technology indicators. Paris: OECD.
Westmore, B. (2013). R&D, patenting and growth: the role of public policy, OECD Economics Department Working Papers, No. 1047, OECD Publishing, Paris. https://doi.org/10.1787/5k46h2rfb4f3-en.
Yang, C., Huang, C., & Hou, T. C. (2012). Tax incentives and R&D activity: firm-level evidence from Taiwan. Research Policy, 41(9), 1578–1588. https://doi.org/10.1016/j.respol.2012.04.006.
Zùniga-Vicente, J. A., Alonso-Borrego, C., Forcadell, F. J., & Galàn, J. L. (2014). Assessing the effect of public subsidies on firm R&D investment: a survey. Journal of Economic Surveys, 28, 36–67. https://doi.org/10.1111/j.1467-6419.2012.00738.x.
Acknowledgements
With the usual disclaimers, we wish to thank two anonymous reviewers for their helpful comments and suggestions.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Sterlacchini, A., Venturini, F. R&D tax incentives in EU countries: does the impact vary with firm size?. Small Bus Econ 53, 687–708 (2019). https://doi.org/10.1007/s11187-018-0074-9
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11187-018-0074-9