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Does an R&D Tax Credit Affect R&D Expenditure? The Japanese Tax Credit Reform in 2003

Hiroyuki Kasahara (), Katsumi Shimotsu and Michio Suzuki ()

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

Abstract: To what extent does a tax credit affect firms' R&D activity? What are the mechanisms? This paper examines the effect of the 2003 Japanese tax credit reform on firms' R&D investment by exploiting cross-sectional variation across firms in the changes in the effective tax credit rate between 2002 and 2003. When we use the benchmark sample to estimate the first-difference equation between 2002 and 2003, our estimate for the elasticity of R&D investment with respect to the effective tax credit rate is 2.05% with a standard error of 0.60, and the estimated effect of the R&D tax credit on R&D investment is significantly larger for small firms with relatively large outstanding debts. When we use different methods and different samples, we find mixed evidence for the positive effect of the R&D tax credit, but an interaction term between the effective tax credit rate and the debt-to-asset ratio is always estimated to be significant for small firms, providing robust evidence for the role of financial constraint in determining the effect of the R&D tax credit.

Keywords: R&D; Tax Credit; Fnancial Constraint; Japan (search for similar items in EconPapers)
JEL-codes: D22 H25 H32 K34 O31 O38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ino and nep-pbe
Date: 2012-01
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Working Paper: Does an R&D Tax Credit Affect R&D Expenditure? The Japanese Tax Credit Reform in 2003 (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hst:ghsdps:gd11-220

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