Impact of research tax credit on R&D and innovation: evidence from the 2008 French reform

R&D and innovation are seen as key determinants of productivity and competitiveness and it has been recognized that the low growth performances of EU countries of the last decades can largely be attributable to their poor research performance, as compared to the US. As a consequence, most EU countries, in particular since the adoption of the Lisbon strategy, have provided tax incentives to increase business R&D, which still remains below the targeted level of 2% of GDP. In the actual context of large public deficit and given the amount of public spending involved, it is crucial to evaluate the impact and effectiveness of these policies. The aim of this paper is to contribute to this literature by evaluating the impact of the research tax credit system on both R&D investments and innovation. In our empirical analysis, we focus on the 2008 French reform, which was marked by the adoption of a pure volume-based scheme.Our empirical analysis relies on an ex post econometric evaluation of the 2008 reform. It is based on the combination of four datasets over the period 2004-2010: i) the yearly survey on R&D investments conducted by the French Ministry of Research which contains detailed information on firms' R&D, ii) the PATSTAT dataset of the European Patent Office which enables us to measure innovation at the firm-level (as measured by a count of the number of patents) iii) the tax files which enables us to identify all the firms in France which benefit from the research tax credit as well as it amount, and iv) the FIBEN dataset of the Banque de France which is used to control for firms' economic and financial characteristics. Our final sample includes 48,111 firms, from which 51.3% have taken advantage of the research tax credit. Our econometric strategy relies on the implementation of a difference in difference which amounts to comparing R&D and innovation outcome for firms which benefit from the research tax credit and for those which do not, before and after the implementation of the reform. The fact that each year in France, nearly 49% of firms which are registered in the R&D survey and which have positive R&D expenditures do not ask for the research tax credit can have several explanations: firms might not be aware of the policy, their R&D activities might not be eligible to the tax credit, asking for the research tax credit might be too complex and costly or firms might want to avoid a tax audit. Nevertheless, as we cannot exclude the possibility of a selection bias in the sample of treated and control firms, we also implemented propensity score matching analysis and are currently trying to refine our empirical strategy by using the suppression of the research tax credit ceiling. Our preliminary results suggest that firms which did benefit from the R&D tax credit relative to those that did not ask for it have significantly increased their R&D expenditures after the 2008 reform. Our results also show that the estimated elasticity differs when we focus on the intensive margin (i.e. when the sample is limited to firms which already ask for the research tax credit before the reform) as the reform led to a large number of firm entry in the tax credit scheme which are relatively smaller in terms of R&D investments. More importantly, we do not find evidence of a significant impact on innovation as measured by the number of patents at the firm level, up to 2 years after the implementation of the reform. Though the time span of analysis is short and that patenting can take more years, these preliminary results suggest that the effects of research tax credit on innovation might be more limited than expected. Finally, our results enable us to shed light on the relative effectiveness of the volume scheme as compared to the incremental one.