Research notes · Knowledge

If a government subsidises research, do firms do more of it — or just claim more?

What the authors found

Dechezleprêtre, Einiö, Martin and Nguyen exploit a change in the asset-based size thresholds determining eligibility for UK R&D tax relief, giving a regression discontinuity around an arbitrary cutoff. They find positive causal effects on a firm's own research and patenting, and on that of its technological neighbours — the spillover being the part that justifies public support in the first place.

What our data adds

National research intensity varies far more than tax policy does, which is a caution about how much any single instrument explains. Israel spends 6.35 per cent of GDP on research and Korea 4.94, against 3.45 for the United States, 3.15 for Germany and 1.79 for Canada. The gap between Israel and Canada is larger than the effect any tax credit has been credited with. Whatever drives these differences is mostly not the design of an R&D allowance.

What this cannot show

That observation is not an argument against tax incentives and should not be read as one: the paper identifies a marginal effect on firms near a threshold, which is entirely compatible with national levels being set by industrial structure, defence spending and the size of the university system. Aggregate R&D also mixes public and private spending, and tax relief only touches the second. Note too that these figures use each country's own latest year, not a common one.

The data behind it

Related notes

• When cheap imports arrive, do domestic firms innovate their way out or give up?
• Rich countries spend more on research every year. Why is measured productivity growth falling?
• How much of what gets patented rests on publicly funded science?

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