The incentive effects of R&D tax credits: An empirical examination in an emerging economy

This paper investigates whether an increase in the R&D tax credit rate stimulates firms' incremental R&D spending. We find that the increase in the credit rate has a positive effect on the R&D spending of high tech firms with taxable status, but does not have the same positive effect on non high tech firms. These results indicate that tax incentives alone may not be effective to increase R&D spending if firms do not have profitable innovation opportunities. Further, we find that when the tax incentive is structured as a credit based on incremental R&D spending over a moving average base, firms opportunistically time their R&D spending patterns to obtain additional tax credits, resulting in greater variability in R&D spending and potentially the unintended loss of tax revenues. This study contributes to the ongoing global debate about the efficacy of tax policies toward R&D by providing firm level evidence from a large cross section of firms in an emerging economy. (C) 2017 Elsevier Ltd. All rights reserved.