Tax incentives and R&D activity: Firm-level evidence from Taiwan

This paper investigates the effect of tax incentives on R&D activities in Taiwanese manufacturing firms. The propensity score matching (PSM) estimates show that recipients of R&D tax credits appear on average to have 53.80% higher R&D expenditures than that they do without receiving tax credits, while there is no significantly higher growth rate of R&D expenditure. This study further employs the panel instrumental variable (IV) and generalized method of moment (GMM) techniques to control for endogeneity of R&D tax credits and firm heterogeneity in determining R&D expenditure. The R&D tax credit is witnessed to exhibit a significantly positive influence on R&D expenditure and its growth, especially for electronics firms. The marginal effect is moderate, ranging from 0.094 to 0.120. Specifically, the R&D elasticity concerning tax credits tends to increase gradually along with the approaching expiration of R&D tax credits measure, lending a supportive view on its efficacy.

► This paper investigates the effect of tax incentives on R&D activities in Taiwan.
► Recipients of R&D tax credits have a higher R&D expenditure in the PSM estimation.
► The panel IV and GMM techniques are used to control for the endogenous problem.
► R&D tax credit does have a positive impact on R&D expenditure and its growth.
► R&D elasticity of tax credit remains similar during pre-expiration period of SUI.