R&D tax credit and firm behavior

Studies carried out to date assessed and compared the impact of public support for R&D activities, whether in direct funding (grants) or tax credits. This paper studies how these instruments’ affect R&D personnel.

The growing knowledge orientation of the economy and society and changes in the labor market make investing in skills and their lifelong upgrading increasingly important. Skilled human capital for research, innovation, and economic development are crucial in sustaining the needs of a knowledge economy.

An increasing number of countries have adopted goals-based R&D policies to stimulate innovation and R&D based on two principles: business R&D is the primary driver of innovation and economic growth, and current R&D expenditures are insufficient to reach the desired levels of innovativeness and competitiveness.

Firms’ R&D efforts in response to policy changes may vary depending on whether policy changes are perceived to be permanent or transitory. Thus, the magnitude of public support may vary over time and be affected by firms’ R&D investment behavior and its persistency. R&D tax incentives may also vary with their design, direct funding, or other forms of government support. R&D fiscal incentives lead to more substantial additionality effects in R&D intensive sectors being stronger for companies in more R&D oriented industries than for firms in sectors with lower R&D orientation.

Based on the estimation of impulse-response functions by local projections, This paper assesses the impact of introducing the tax incentive scheme for corporate R&D in firms from different R&D intensity sectors. There is evidence to suggest that the tax credit implemented in Portugal offers an attractive source of support for firms in the allocation of PhD holders, in particular in the medium-high, and high R&D intensity sectors. Furthermore, the results from the model adopted show that the fiscal shock – the introduction of SIFIDE – had a significant impact on the case of PhD holders.

Click here to go to the paper by Alexandre Paredes, Joana Mendonça, Fernando Bação, Bruno Damásio.