Absorptive capacity and R&D tax policy: Are in-house and external contract R&D substitutes or complements?
AbstractFirms fund research and development (R&D) to generate commercializable innovations and to increase their ability to understand and absorb knowledge from elsewhere. This dual role and opposed incentive structure of internal R&D creates a significant question for both theory and R&D policy: Is internal R&D a complement or substitute for external R&D? We develop a model and novel technique for empirically estimating R&D substitution elasticities. We focus on bio-pharmaceutical and software industries in California and Massachusetts, where tax credit rates changed differently over time for the two types of R&D, creating a natural experiment. The effective tax prices for the two R&D types differ from type to type, firm to firm, state to state, and year to year. This allows us to examine changes in the composition of firmsâ R&D budgets between in-house R&D and external basic research when the relative tax prices of each category of research changes. For a sample comprised largely of small and medium-sized firms, we find evidence of a substitute relationship.
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Bibliographic InfoArticle provided by Springer in its journal Small Business Economics.
Volume (Year): 33 (2009)
Issue (Month): 2 (August)
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Web page: http://www.springerlink.com/link.asp?id=100338
R&D; Absorptive capacity; Tax credit; R&D substitution; Technology policy; O31; O38; L26; L65; L86;
Other versions of this item:
- Todd A. Watkins & Lolita Paff, 2007. "Absorptive Capacity and R&D Tax Policy: Are In-house and External Contract R&D Substitutes or Complements?," Working Papers 116, National University of Ireland Galway, Department of Economics, revised 2007.
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
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