The Design of R&D Tax Incentive Schemes and Firm Innovation

Heli Koski and Paolo Fornaro

No 123, ETLA Reports from The Research Institute of the Finnish Economy

Abstract: Abstract Research and development (R&D) tax credits are widely employed among the OECD countries to promote business sector investments in innovation. The implementation of R&D tax credit schemes, however, varies across countries. The empirical research on the effectiveness of R&D tax incentives suggests that the strength of company responses (in R&D expenditures) to more generous tax incentives substantially differ across countries. We use data from 25 OECD countries, collected from 2010 to 2018, to explore the relationship between a set of R&D tax scheme features and innovation performance. Our estimation results show that the business sector R&D expenditure is higher among those countries that have implemented either an R&D tax credit scheme with an incremental deduction basis or a hybrid scheme with both volume-based and incremental tax relief components. The input additionality is highest when the R&D tax incentives are based on the incremental deduction. Further, the hybrid tax credit scheme positively relates to innovation output. The business sector R&D investment are higher in the countries with an R&D tax credit scheme that provides favorable treatment for SMEs or option to carry forward unclaimed R&D tax credits.

Keywords: R&D tax incentives; R&D investments; Innovation policy; Patents (search for similar items in EconPapers)
JEL-codes: K34 L5 O3 O31 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-01-19
New Economics Papers: this item is included in nep-acc, nep-ent, nep-ino, nep-pbe, nep-sbm and nep-tid
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