Portuguese Economy Research Report

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Rui Albuquerque

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This page is curated by Professor Rui Albuquerque, who is affiliated with Boston College, the European Corporate Governance Institute, and the Centre for Economic Policy Research. His main research interests are in asset pricing, corporate governance, and corporate social responsibility.

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This forum is dedicated to research on the Portuguese Economy. All scientific research on the Portuguese economy is welcome, namely research produced in the context of Master’s dissertations, PhD theses, or that circulates as working papers, as well as published work (articles, chapters, and books).

The effects of R&D tax credits (SIFIDE scheme) on small and large firms in Portugal

February 27, 2024

Governments worldwide increasingly rely on incentive schemes to promote research and development (R&D) investment, foster innovation, and encourage economic growth. While in 2000, 19 out of the 38 OECD countries gave preferential tax treatment to business R&D expenditure, in 2022 this number increased to 33 countries. What is the effect of (R&D) tax credits on firms’ trajectory? Do firms become more efficient?

Dynamic marginal effects on R&D-related expenditure from SIFIDE tax credits. The sample only includes firms that benefited from the program for up to two years, alongside the control group. As the graph shows, investments increase significantly while firms are benefiting from the program, but the effect fades away immediately after.
Caption: Dynamic marginal effects on R&D-related expenditure from SIFIDE tax credits. The sample only includes firms that benefited from the program for up to two years, alongside the control group. As the graph shows, investments increase significantly while firms are benefiting from the program, but the effect fades away immediately after.

This paper estimates the effect of R&D tax credits on the trajectory of firms in Portugal. The research focuses not only on R&D expenditures, but also on scale, productivity, workforce composition and technological adoption. The authors leverage Portuguese data on the SIFIDE tax credits scheme, combined with rich longitudinal data on innovation, employment, and performance at the firm-level. The SIFIDE program allows firms to receive an initial 32.5% of their R&D spending as tax credits, with an additional rate for R&D spending above the prior two years average. 

The authors show that tax credits increase investment in R&D-related activities while funds are being received, yet not afterward (see figure). In large firms, productivity and efficiency (but not employment) increase. These effects are driven by structural changes, both in terms of the increased share of skilled individuals within the firm (keeping the overall employment level constant) and enhanced technological adoption. In contrast, small firms mostly respond by increasing employment and production scale. 

The results suggest an important trade-off: R&D tax credit programs that target large firms are likely to lead to efficiency and productivity gains, but limited effects on employment of supported firms. In contrast, R&D tax credit programs that mostly benefit small firms may lead to employment gains in supported firms, but limited effects on long-term changes in productivity and efficiency.

Click here to go to the paper by Anna Bernard, Rahim Lila, and Joana Silva.

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