Tax Incentives and R&D Activity: Firm-Level Evidence from Taiwan

Chia-Hui Huang and Chih-Hai Yang

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper investigates the effect of tax incentives on R&D activities in Taiwanese manufacturing firms. Specifically, we assess the potential R&D-enhancing effect on recipients of R&D tax credits compared with their non-recipient counterparts. Moreover, the potential difference in the R&D-enhancing effect between high-tech and non-high-tech firms is also examined. Utilizing a firm-level panel dataset during 2001 and 2005, empirical results obtained by propensity score matching show that recipients of R&D tax credits appear on average to have 93.53% higher R&D expenditures and a 14.47% higher growth rate for R&D expenditures than non-recipients with similar characteristics. The R&D-enhancing effect of R&D tax credits is not found to be particularly relevant to high-tech or non-high-tech firms. We further employ a generalized method of moment (GMM) of the panel fixed model to control for the endogeneity of R&D tax credits and firm heterogeneity in determining R&D expenditure. Various estimates based on the entire sample and high-tech-firms are quite similar and there is a significantly R&D-enhancing effect of R&D tax credits. This result suggests that the R&D preferential policy has induced more R&D expenditure by firms in Taiwan. While the existence of the R&D-enhancing effect brought on by tax incentives is intuitive, the estimates can provide insightful implications for the R&D tax policy.

Keywords: R&D; Tax; Propensity Score Matching (search for similar items in EconPapers)
JEL-codes: H25 H32 K34 O32 O38 (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-ino, nep-pub, nep-sbm and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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