R&D Spillovers through Buyer-supplier Networks

We study how R&D spillovers propagate through buyer–supplier networks. The R&D tax credit for large firms in Japan—originally based on incremental increases in R&D expenditures—was revised in 2003 to cover total R&D expenditures. This reduced the cost of marginal R&D outlays for large firms below the ceiling on R&D expenditure, but not for large firms above the ceiling or for SMEs. In a difference-in-differences setting, we find that the reform increased R&D expenditure, innovative output and sales of the treated firms. We further present evidence of positive forward spillovers to downstream firms: the reform led to productivity increases among firms that had a greater share of suppliers treated by the reform. Conversely, we do not find any evidence of backward spillovers to upstream firms. We also do not find any robust effects of the reform on the R&D expenditure and economic performance of Japanese firms' overseas affiliates.