UNU-MERIT Working Papers Series
Tax incentives or subsidies for R&D?
Isabel Busom, Beatriz Corchuelo & Ester Martínez-Ros #2012-056This paper studies whether firms' use of R&D subsidies and R&D tax
incentives are correlated to two sources of underinvestment in R&D,
financing constraints and appropriability. We find that financially
constrained SMEs are less likely to use R&D tax credits and more likely
to obtain subsidies. SMEs using legal methods to protect their
intellectual property are more likely to use tax incentives. Results are
ambiguous for large firms. For both having previous experience in R&D
increases the likelihood of using tax incentives, while it reduces the
likelihood of using exclusively subsidies, suggesting that the latter
induce entry into R&D. Results imply that direct funding and tax credits
do not have the same ability to address each source of R&D
underinvestment, and that on average subsidies may be better suited than
tax credits at least for SMEs. From a policy perspective these tools may
be complements rather than substitutes.
Keywords: R&D, tax incentives, subsidies, policy mix
JEL classification: H25, L60, 038, O31
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