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Business Group Taxation and R&D Activities

Author

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  • Masanori Orihara

    (Economist, Policy Research Institute, Ministry of Finance, Japan, University of Illinois at Urbana-Champaign)

Abstract

Economic theory dating to Domar and Musgrave (1944) suggests that the tax treatment of gains and losses can affect firms f incentives to undertake high-risk investments. Exploiting a 2002 tax law change in Japan that allows business groups to adopt a consolidated taxation system (CTS) and using an IV strategy, I identify the causal impact of mitigating tax loss asymmetry on R&D activities. With unique firm-level panel data between 1997 and 2011, I show that CTS adoption increases total R&D expenses among individual business groups. More specifically, CTS adoption increases the following, especially among parent companies of business groups: the number of employees engaging in R&D; expenses for property, plant, and equipment for R&D; and expenses for R&D outsourcing. Evidence of ex-ante efficiency of CTS adoption measured by market-to-book ratio is limited, while CTS adoption improves expost efficiency measured by income from patent transactions. These findings support that mitigating tax loss asymmetry facilitates efficient developments of high-risk investments in line with Domar and Musgrave.

Suggested Citation

  • Masanori Orihara, 2013. "Business Group Taxation and R&D Activities," Discussion papers ron254, Policy Research Institute, Ministry of Finance Japan.
    • Handle: RePEc:mof:wpaper:ron254
    as

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    File URL: https://warp.da.ndl.go.jp/info:ndljp/pid/11217434/www.mof.go.jp/pri/research/discussion_paper/ron254.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    business group; corporate income tax; loss treatment; R&D activity; instrumental variable method;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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