The impact of public R&D subsidies and tax incentives on business R&D expenditures

Abstract

Purpose: Private R&D investment in the business sector is often subject to market failures, such as positive externalities, information asymmetries, uncertainty and risk, making it often less than socially desirable. This is the primary reason that governments promote private R&D investment. Accordingly, the main aim of this paper is to investigate the impact of public R&D policy on business R&D expenditures. Design/methodology/approach: Applying panel data regression analysis on a sample of 3,113 company-year observations, covering Slovenian companies for the period 2012-2016. Findings: The empirical results show that public support for R&D investment plays an important role in firms’ R&D expenditures. As to R&D subsidies, the empirical results reveal they are generally ineffective since they displace firms’ R&D expenditures. Yet they do become effective when used in combination with R&D tax incentives and received by companies that are growing. On the contrary, the empirical results also show that R&D tax incentives are always effective when companies have a sufficient tax base. Practical Implications: The overall findings suggest that R&D tax incentives are more effective than R&D subsidies in Slovenia. However, R&D subsidies are still attractive especially for smaller companies without a sufficient tax base. It is hence important to consider both public policy instruments as two parallel ways of supporting firms’ R&D expenditures. Originality/value: Utilising a comprehensive dataset covering Slovenian companies made by merging multiple data sources, namely R&D survey, tax, balance-sheet and incomestatement data, representing the main originality and value of the paper.