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 firms’ 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 InfoPaper provided by National University of Ireland Galway, Department of Economics in its series Working Papers with number 116.
Date of creation: 2007
Date of revision: 2007
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Other versions of this item:
- Todd Watkins & Lolita Paff, 2009. "Absorptive capacity and R&D tax policy: Are in-house and external contract R&D substitutes or complements?," Small Business Economics, Springer, vol. 33(2), pages 207-227, August.
- 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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