R&D Tax Credits across the EU: Nonsense or Common Sense? A Dynamic Panel Data Approach

We re-examine the R&D - innovation - productivity nexus in 8 EU countries in the context of a possible EU-wide "super deduction" on R&D expenditures, using panels of industries with a long time dimension. We introduce dynamics in the innovation production function and extended production function models, taking the availability/unavailability of R&D tax credits (R&DTC) into account. Our benchmark estimates, obtained with panel ARDL models, yield positive longrun elasticities of innovation and productivity with respect to R&D intensity. R&D conducted under an R&DTC either reinforces an already-existing positive elasticity or makes it significantly positive if it was not before. Disentangling the respective effects of ’pure’ business R&D and of government-supported R&D reveals a wider diversity of situations, however. The effect of R&DTC is less often significant, sometimes superseded by other forms of public support to R&D. The main policy implication of these results is that a harmonized "super-deduction" on R&D at the EU level may be slightly premature. Complementary analyses suggest that targeting specific industries may make such a policy more effective and accurate.