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Long run effect of public grants and tax credits on R&D investment: A non-stationary panel data approach

Inmaculada Álvarez (), Chihwa Kao and Desiderio Romero-Jordán

Economic Modelling, 2018, vol. 75, issue C, 93-104

Abstract: R&D investment is a key factor in long run economic growth. This paper analyzes the effectiveness of public grants and tax credits used to promote long-run R&D investment. Cointegration techniques have been used to deal with the existence of common trends, which might lead to spurious correlation. In this context, we propose a new empirical strategy applying DOLS and FMOLS estimators to the cointegrated firms and the LSDV estimator to non-cointegrated firms. Cointegrated firms are those that invest persistently in R&D while non-cointegrated firms invest in a non-continuous or occasional way. A panel of 237 Spanish manufacturing firms for the 1990–2009 period is used. We find evidence that public grants are more effective for firms where R&D investment is persistent and the quality of projects matters. In addition, our results suggest that a tax credit is suitable for boosting long-run R&D investment as a whole, especially if the base amount of tax credit is incremental. Surprisingly, incremental tax credit is only in force in a few countries such as Italy, Korea, Mexico, Portugal, United States and Spain.

Keywords: R&D; Public grants; Tax credits; Effectiveness; Panel data (search for similar items in EconPapers)
JEL-codes: G31 G32 O32 E44 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:75:y:2018:i:c:p:93-104

DOI: 10.1016/j.econmod.2018.06.011

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