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Employment versus Efficiency: Which Firms Should R&D Tax Credits Target?

Author

Listed:
  • Anna Bernard
  • Rahim Lila
  • Joana Silva

    (Católica School of Business and Economics, Universidade Católica Portuguesa
    Charles Rivers Associate
    Católica School of Business and Economics, Universidade Católica Portuguesa)

Abstract

R&D tax credits, by stimulating private sector innovation, can play a key role in promoting employment and firm performance. This paper examines the program impact on the trajectory of firms in terms of technology adoption, firm performance and workforce composition, and the extent to which it depends on the size of the targeted firms. It uses rich longitudinal micro-data on innovation, firms and their workers. Combining matching with a staggered adoption differences-in-differences, we show that tax credits increase investment in R&D-related activities while funds are being received, but not thereafter. Productivity and efficiency (but not employment) increase in large firms. These effects are driven by structural changes, both in terms of the increased share of skilled individuals within the firm (keeping the overall employment level constant) and enhanced technological adoption. In contrast, small firms mostly respond by increasing employment and production scale. Our results suggest that an important trade-off: R&D tax credit programs that target large firms are likely to lead to efficiency and productivity gains, but limited effects on employment of supported firms. In contrast, R&D tax credit programs that mostly benefit small firms may lead to employment gains in supported firms, but limited effects on structural changes in productivity and efficiency.

Suggested Citation

  • Anna Bernard & Rahim Lila & Joana Silva, 2023. "Employment versus Efficiency: Which Firms Should R&D Tax Credits Target?," GEE Papers 0176, Gabinete de Estratégia e Estudos, Ministério da Economia, revised Jul 2023.
    • Handle: RePEc:mde:wpaper:0176
    as

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    File URL: https://www.gee.gov.pt//RePEc/WorkingPapers/GEE_PAPERS_176.pdf
    File Function: First version, 2023
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    R&D tax credits; Innovation; SIFIDE; Matching; Differences-in-Differences;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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