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How Much Do R&D Tax Credits Affect R&D Expenditures? Japanese tax credit reform in 2003

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  • KASAHARA Hiroyuki
  • SHIMOTSU Katsumi
  • SUZUKI Michio

Abstract

How much do tax credits affect firms' R&D activities? What are the mechanisms? Few empirical studies directly examine the effect of tax credit policies on firms' R&D investments and the importance of financial constraints on the policy effects on R&D. This paper examines the effect of the Japanese tax credit reform in 2003 on firms' R&D investments by exploiting cross-firm variation in the changes in the effective tax credit rate between 2002 and 2003. Regression results suggest a significantly positive effect of the change in the effective tax credit rate on corporate R&D investments. Across different specifications, the estimated (semi-) elasticity of R&D investments with respect to the effective tax credit rate is 2.3 with an approximate standard error of 0.6. We also examine the policy implications of financial constraints on R&D investments and find that the effect of tax credits is significantly larger for firms with relatively large outstanding debt.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 11072.

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Length: 30 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:eti:dpaper:11072

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  1. Ogawa, Kazuo, 2007. "Debt, R&D investment and technological progress: A panel study of Japanese manufacturing firms' behavior during the 1990s," Journal of the Japanese and International Economies, Elsevier, vol. 21(4), pages 403-423, December.
  2. Stephen Bond & Dietmar Harhoff & John Van Reenen, 2003. "Investment, R&D and financial constraints in Britain and Germany," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 771, London School of Economics and Political Science, LSE Library.
  3. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, American Finance Association, vol. 64(1), pages 151-185, 02.
  4. Bloom, Nicholas & Griffith, Rachel & Van Reenen, John, 2000. "Do R&D Credits Work? Evidence From A Panel Of Countries 1979-97," CEPR Discussion Papers 2415, C.E.P.R. Discussion Papers.
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