Employment versus Efficiency: Which Firms Should R&D Tax Credits Target?

Anna Bernard, Rahim Lila and Joana Silva

No 176, GEE Papers from Gabinete de Estratégia e Estudos, Ministério da Economia

Abstract: R&D tax credits, by stimulating private sector innovation, can play a key role in promoting employment and firm performance. This paper examines the program impact on the trajectory of firms in terms of technology adoption, firm performance and workforce composition, and the extent to which it depends on the size of the targeted firms. It uses rich longitudinal micro-data on innovation, firms and their workers. Combining matching with a staggered adoption differences-in-differences, we show that tax credits increase investment in R&D-related activities while funds are being received, but not thereafter. Productivity and efficiency (but not employment) increase in large firms. These effects are driven by structural changes, both in terms of the increased share of skilled individuals within the firm (keeping the overall employment level constant) and enhanced technological adoption. In contrast, small firms mostly respond by increasing employment and production scale. Our results suggest that an important trade-off: R&D tax credit programs that target large firms are likely to lead to efficiency and productivity gains, but limited effects on employment of supported firms. In contrast, R&D tax credit programs that mostly benefit small firms may lead to employment gains in supported firms, but limited effects on structural changes in productivity and efficiency.

Keywords: R&D tax credits; Innovation; SIFIDE; Matching; Differences-in-Differences (search for similar items in EconPapers)
JEL-codes: H25 O31 O38 (search for similar items in EconPapers)
Date: 2023-07, Revised 2023-07
New Economics Papers: this item is included in nep-bec, nep-eff, nep-eur, nep-ind, nep-ino, nep-lma, nep-pbe, nep-pub, nep-sbm and nep-tid
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https://www.gee.gov.pt//RePEc/WorkingPapers/GEE_PAPERS_176.pdf First version, 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mde:wpaper:0176

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