The impact of R&D tax incentives in Portugal

August 4, 2021

Should governments intervene in the promotion of R&D and innovation? Are such policies effective? From a theoretical point of view, the answer to the first question seems consensual. In addition to the benefits from innovation at the firm-level, the fact that derived knowledge and new technologies can be disseminated throughout the economy, gives rise to social benefits that exceed private ones. As such, private R&D investment is usually lower than socially desirable, which justifies public intervention.

However, empirically, the answer to the second question is less clear. Although most studies support the affirmative, some yield insignificant results or conclude that effects on R&D are insufficient to justify policy costs. Previous results seem to depend more on the characteristics of the policy than on methodological issues. In fact, a rationale for public intervention does not necessarily guarantee that policies are well-designed, -implemented, or -monitored, and effectiveness is naturally sensitive to these issues. This, together with the relevance of policy goals and costs involved, reinforces the importance of conducting policy evaluations.

This paper evaluates the impact of the Portuguese system of tax incentives to corporate R&D investment (SIFIDE) on firms’ behaviour and incentives to invest in R&D. Propensity Score Matching and Differences-in-Differences methodologies are used, minimizing the selection bias typically present in policy evaluations (e.g., firms benefiting from policies are also more prone to have better outcomes).

The results show the effectiveness of SIFIDE in promoting additional private investment in intangible assets in an amount that exceeds public support (crowding-in effect). The policy also promotes an increase in firm’s staff in R&D activities and exports. Results also show some persistence in these effects. Even when policy programmes are concluded, firms that previously benefitted from these continue to invest more in R&D. Effects are particularly relevant for micro and small firms and for business services, especially in the Information and Communication Technology sector.

Click here to go to the paper by Rita Bessone Basto, Ana Martins, and Guida Nogueira.