GS: direct Gov. support on R&D

Direct subsidies that are accompanied a government’s project are distributed through grants to firms for specific projects or research areas. Such funding could be concentrated in areas where there is a large gap between the social and the private rate of return. The R&D subsidy lowers the private cost of the project, so the subsidy may turn an unprofitable project into a profitable one by the firm. R&D subsidy can also reduce the fixed costs of research facilities and it can motivate the profitability of undertaking R&D activity. Hence, the R&D subsidy can stimulate current and future private R&D expenditures. Compared with fiscal incentives for R&D activities, subsidies are likely to be captured by firms with low income taxes, so subsidies should not influence the tax coefficient.

Taux = rate of tax credit;

CT = corporate income tax rate;

LT = tax price of Labour related to R&D;

MET = tax price of machinery and equipment used for the purposes of R&D;

BST = tax price buildings and structures used for the purposes of R&D;

FT = tax price for R&D expenditure that applicable to cross border R&D

Our focus now shifts to different types of fiscal incentives. Fiscal incentives for R&D can take various forms (see Table 1). There are many reasons for the government to use these policy instruments: changes in tax structure often affect agents’ behavior. For example an increase in corporate tax rates distort the relative value of resources and lower the net rate of return to private R&D investment. Then, R&D activity of resources and lower the net rate of return to private R&D investment. Then, R&D activities are less attractive and the rate of growth declines. Therefore, taxes on investment and income have a detrimental impact on investment activities and economic growth in an economy. On the other hand, R&D tax credit can support firms to increase financial resources which are committed to technological innovation. That is tax credit are deducted from the corporate income tax, so an increase in R&D tax credit lowers the user cost of capital and R&D investment becomes more competitive. Then, tax credit will stimulate further research on R&D and contribute to economic growth and social welfare.

RDR: RD_t−1 (inclusion of lagged R&D)

To control for the prior year’s R&D expenditure, most empirical studies introduce lagged R&D expenditures to distinguish short-run and long-run effects. The prior year’s R&D spending for each firm acts as an important determinant in conducting the new investment. And the positive coefficient on the lagged R&D stock variables indicates that firms performing R&D continue to do so.

HTECH

dummy: 1 if high-tech subsamples firms, 0 otherwise.

SME

variable (dummy for SMEs subsamples).

INVERSE

Inverse of the standard error (SE) of the effect estimated.

MANUF

dummy: 1 if manufacturing subsamples, 0 otherwise.

FET

Funds from abroad foreign enterprises.