Causal Effects of a Tax Incentive on SME Capital Investment

We estimate the causal effects of a tax incentive for specific productivity-enhancing equipment that was introduced in 2014 for Japanese small and medium-sized enterprises. Using firm-level panel data, we obtain the following findings. First, the introduction of the tax incentive did not on average effectively increase the capital investment ratio of eligible firms, which could be due to the small number of firms using the incentives. Second, despite the first finding, the firms using the tax incentive increased their capital investment ratio and improved labor productivity more than the comparable firms did. Third, firms using the tax incentive did not increase capital intensity. Fourth, among the firms using the tax incentive, less cash-rich, smaller, and younger firms increased their capital investment ratio to a greater degree. These results show that the actual use of the tax incentive mitigates financial constraints in upgrading capital and improving labor productivity.