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Does an R&D Tax Credit Affect R&D Expenditure? The Japanese Tax Credit Reform in 2003

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  • Hiroyuki Kasahara
  • Katsumi Shimotsu
  • Michio Suzuki

Abstract

To what extent does a tax credit affect firms' R&D activity? What are the mechanisms? This paper examines the effect of the 2003 Japanese tax credit reform on firms' R&D investment by exploiting cross-sectional variation across firms in the changes in the effective tax credit rate between 2002 and 2003. When we use the benchmark sample to estimate the first-difference equation between 2002 and 2003, our estimate for the elasticity of R&D investment with respect to the effective tax credit rate is 2.05% with a standard error of 0.60, and the estimated effect of the R&D tax credit on R&D investment is significantly larger for small firms with relatively large outstanding debts. When we use different methods and different samples, we find mixed evidence for the positive effect of the R&D tax credit, but an interaction term between the effective tax credit rate and the debt-to-asset ratio is always estimated to be significant for small firms, providing robust evidence for the role of financial constraint in determining the effect of the R&D tax credit.

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File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd11-220.pdf
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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd11-220.

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Date of creation: Jan 2012
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Handle: RePEc:hst:ghsdps:gd11-220

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Keywords: R&D; Tax Credit; Fnancial Constraint; Japan;

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  1. Bloom, Nick & Griffith, Rachel & Van Reenen, John, 2002. "Do R&D tax credits work? Evidence from a panel of countries 1979-1997," Journal of Public Economics, Elsevier, vol. 85(1), pages 1-31, July.
  2. KOBAYASHI Yohei, 2011. "Effect of R&D Tax Credits for Small and Medium-sized Enterprises in Japan: Evidence from firm-level data," Discussion papers 11066, Research Institute of Economy, Trade and Industry (RIETI).
  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, vol. 64(1), pages 151-185, 02.
  4. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, vol. 29(4-5), pages 449-469, April.
  5. 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.
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Cited by:
  1. Castellacci, Fulvio & Lie, Christine, 2013. "Do the effects of R&D tax credits vary across industries? A meta-regression analysis," MPRA Paper 47937, University Library of Munich, Germany.

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