Absorptive Capacity and R&D Tax Policy: Are In-house and External Contract R&D Substitutes or Complements?

Todd Watkins and Lolita Paff

No 116, Working Papers from National University of Ireland Galway, Department of Economics

Abstract: Firms fund research and development (R&D) to generate commercializable innovations and to increase their ability to understand and absorb knowledge from elsewhere. This dual role and opposed incentive structure of internal R&D creates a significant question for both theory and R&D policy: Is internal R&D a complement or substitute for external R&D? We develop a model and novel technique for empirically estimating R&D substitution elasticities. We focus on bio-pharmaceutical and software industries in California and Massachusetts, where tax credit rates changed differently over time for the two types of R&D, creating a natural experiment. The effective tax prices for the two R&D types differ from type to type, firm to firm, state to state, and year to year. This allows us to examine changes in the composition of firms’ R&D budgets between in-house R&D and external basic research when the relative tax prices of each category of research changes. For a sample comprised largely of small and medium-sized firms, we find evidence of a substitute relationship.

JEL-codes: O31 (search for similar items in EconPapers)
Date: 2007, Revised 2007
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.economics.nuig.ie/resrch/paper.php?pid=123 First version, 2007 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found
http://www.economics.nuig.ie/resrch/paper.php?pid=123 Revised version, 2007 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Absorptive capacity and R&D tax policy: Are in-house and external contract R&D substitutes or complements? (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nig:wpaper:0116

Access Statistics for this paper

More papers in Working Papers from National University of Ireland Galway, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Srinivas Raghavendra ().