R&D tax incentive scheme and in-house R&D expenditure: evidences from Indian firms

Purpose - The purpose of this paper is to examine the impact of research and development (R&D) tax credit scheme on participating firm’s R&D expenditure in Indian manufacturing firms. Design/methodology/approach - Tobit model is used to estimate the impact of R&D tax credit scheme on R&D expenditure. Findings - The results suggest that there is a positive and significant effect of R&D tax incentive scheme on R&D. The introduction of the R&D tax credit scheme and the policy amendment are positively influencing R&D investment of the participating firms. However, industry-specific results suggest that these positive results are mainly driven by electronic and pharmaceutical industries. The study reveals that import of technology, import of raw materials, competition, profitability, age and leverage position of the firm also positively influence the R&D intensity of the firm. Research limitations/implications - The study is limited to the listed manufacturing firms in India. Practical implications - The study evaluates the innovation policy to help the policymakers in designing an effective policy. Originality/value - The paper provides evidence on the impact of R&D tax incentive scheme on firm innovation to explain the factors that contribute to the R&D expenditure of the participating firms. It also summarises the effectiveness of tax incentive scheme on different industry groups and firm size.