Performance feedback and strategic R&D classification: a further study of R&D tax credit

Furong Guo, Niannian Wu and Lei Zhu

Applied Economics Letters, 2023, vol. 30, issue 18, 2560-2564

Abstract: Tax incentives are an important measure in most industrial countries to support firms R&D. However, R&D tax credit leads firms to engage in strategic R&D classification that classifies indirect costs as eligible R&D inputs in order to reduce tax liability. Based on the behavioural theory of the firm, we investigate the impact of performance feedback on firm’s strategic R&D classification. The results show that when performance falls below aspirations, the pressure to achieve aspirations forces firms to reduce strategic R&D classification; when performance is above aspirations, in order to reduce tax liabilities, firms are more willing to engage in strategic R&D classification due to the lack of performance pressure. Our study helps to understand horizontal differences in R&D investment in the context of tax incentives.

Date: 2023
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DOI: 10.1080/13504851.2022.2099795

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