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Evaluating the Impact of R&D Tax Credits on Innovation: A Microeconometric Study on Canadian Firms

  • Petr Hanel

    ()

    (GREDI, Département d'économique, Université de Sherbrooke)

  • Dirk Czarnitzki

    ()

    (Centre for European Economic Research (ZEW), Dept. of Industrial Economics and International Management)

  • Julio Miguel Rosa

    ()

    (Statistics Canada)

This study examines the effect of R&D tax credits on innovation activities of Canadian manufacturing firms. Over the 1997-1999 period the Federal and Provincial R&D tax credit programs were used by more than one third of all manufacturing firms and by close to two thirds of firms in high-technology sectors. We investigate the average effect of R&D tax credits on a series of innovation indicators such as number of new products, sales with new products, originality of innovation etc. using a non-parametric matching approach. Compared to a hypothetical situation in the absence of R&D tax credits, recipients of tax credits show significantly better scores on most but not all performance indicators. We therefore conclude that tax credits increase the R&D engagement at the firm level and that the R&D activities induced by fiscal incentives lead to additional innovation output.

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File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-0501.pdf
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Paper provided by Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke in its series Cahiers de recherche with number 05-01.

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Length: 25 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:shr:wpaper:05-01
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  1. Petr Hanel, 2003. "Impact Of Government Support Programs On Innovation By Canadian Manufacturing Firms," Cahiers de recherche 04-02, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  2. Hall, Bronwyn H., 2002. "The Financing of Research and Development," Department of Economics, Working Paper Series qt34c1c643, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Czarnitzki, Dirk & Kraft, Kornelius, 2000. "An empirical test of the asymmetric models on innovative activity: who invests more into R&D - the incumbent or the challenger?," ZEW Discussion Papers 00-10, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Ravenscraft, David J, 1983. "Structure-Profit Relationships at the Line of Business and Industry Level," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 22-31, February.
  5. Dagenais, M. & Mohnen, P. & Therrien, P., 1997. "Do Canadian Firms Respond to Fiscal Incentives To Research and Development?," G.R.E.Q.A.M. 97b05, Universite Aix-Marseille III.
  6. Paul A. David, Bronwyn H. Hall and Andrew A. Toole., 1999. "Is Public R&D a Complement or Substitute for Private R&D? A Review of the Econometric Evidence," Economics Working Papers E99-269, University of California at Berkeley.
  7. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  8. Harhoff, Dietmar, 1996. "Are there financing constraints for R&D and investment in German manufacturing firms?," ZEW Discussion Papers 96-28, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers 16/99, Norwegian School of Economics and Business Administration-.
  10. Collins, Norman R & Preston, Lee E, 1969. "Price-Cost Margins and Industry Structure," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 271-86, August.
  11. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
  12. Petr Hanel & Alain St-Pierre, 2002. "Effects of R & D Spillovers on the Profitability of Firms," Review of Industrial Organization, Springer, vol. 20(4), pages 305-322, June.
  13. James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," Econometrica, Econometric Society, vol. 66(5), pages 1017-1098, September.
  14. Baldwin,John R. & Hanel,Petr, 2003. "Innovation and Knowledge Creation in an Open Economy," Cambridge Books, Cambridge University Press, number 9780521810869.
  15. Almus, Matthias & Czarnitzki, Dirk, 2001. "The effects of public R&D subsidies on firms' innovation activities: the case of Eastern Germany," ZEW Discussion Papers 01-10, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  16. Czarnitzki, Dirk, 2002. "Research and development: financial constraints and the role of public funding for small and medium-sized enterprises," ZEW Discussion Papers 02-74, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  17. James J. Heckman & Hidehiko Ichimura & Petra Todd, 1998. "Matching As An Econometric Evaluation Estimator," Review of Economic Studies, Oxford University Press, vol. 65(2), pages 261-294.
  18. Hall, Bronwyn & Van Reenen, John, 2000. "How effective are fiscal incentives for R&D? A review of the evidence," Research Policy, Elsevier, vol. 29(4-5), pages 449-469, April.
  19. Michael Lechner, 2000. "An Evaluation of Public-Sector-Sponsored Continuous Vocational Training Programs in East Germany," Journal of Human Resources, University of Wisconsin Press, vol. 35(2), pages 347-375.
  20. Hanel, P. & Palda, K., 1990. "Appropriability and Public Support of R&D in Canada," Papers 90-02, Quebec a Montreal - C.R.E.D.I.T..
  21. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Oxford University Press, vol. 64(4), pages 605-654.
  22. Rajeev H. Dehejia & Sadek Wahba, 1998. "Causal Effects in Non-Experimental Studies: Re-Evaluating the Evaluation of Training Programs," NBER Working Papers 6586, National Bureau of Economic Research, Inc.
  23. Lechner, Michael, 1999. "Earnings and Employment Effects of Continuous Off-the-Job Training in East Germany after Unification," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 74-90, January.
  24. Brian Cozzarin, 2004. "Innovation quality and manufacturing firms' performance in Canada," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 13(3), pages 199-216.
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