Evaluating the Effects of an R&D Policy Mix of Subsidies and Tax Credits

This paper studies the additionality of a policy mix of R&D subsidies and wage-based tax credits on firms’ spending on basic research, applied research, and on development activities. Using non-parametric matching and instrumental variables estimations on a rich dataset of R&D-active companies, the results show that tax credits and subsidies have substantially different effects on firms’ R&D budgets. First, while tax credits alone increase private R&D spending, subsidies only do so when they are used together with tax credits. Second, tax credits seem to outperform subsidies, showing positive effects on all types of R&D. Subsidies only increase research spending when mixed with tax credits, and have no effect on development spending. These results have interesting implications for R&D policy design and R&D management.