R&D grants, R&D tax credits, and the support to co-operation with research institutes are three important instruments governments use to stimulate R&D spending in private corporations. While various studies have proven the effectiveness of each of these measures in general, the cumulative effects of their sequence and timing have not been examined in sufficient detail yet. ZEW Mannheim has, in close cooperation with a research team from the University of Limerick and supported by Science Foundation Ireland, made a first pass at exploring these potential timing effects, using extensive panel data for firms from Ireland.
After receiving a one-time R&D grant or an R&D tax credit, companies have been shown to increase their R&D activity. “When companies receive a second grant or tax credit in one of the following years, the combined effect of these measures is much higher – in some cases twice as large,” says Dr. Christian Rammer, deputy head of the “Economics of Innovation and Industrial Dynamics” Unit at ZEW. This effect depends, however, on the order of the instruments. The supplementary effects of these R&D initiatives only hold when the first measure is a grant – no similar effect is demonstrated when companies receive a tax credit or engage in a co-operation programme in the first instance. Nevertheless, multiple tax credits over time induce measurable effects on R&D activities at a company even if they are preceded by a differing policy instrument.
Government-sponsored co-operation initiatives show long-term effects
The positive effects of state-funded co-operation programmes between research entities and corporations are less apparent, as this policy instrument by itself hardly shows any statistically significant effect on R&D spending at company level. As a follow-up measure to grants or tax credits, however, these programmes prompt companies to increase their R&D activities. “Companies develop new R&D capacities when working with a research institution and utilise these new faculties at a later date when government programmes give them the financial leeway necessary to do so,” explains Rammer. His summary: “Our study suggests that policymakers ought to consider the sequence in which they employ these policy instruments when they want to encourage companies’ R&D activities over a longer-term horizon.”
The study is based on administrative data regarding R&D funding made available by the Irish government as well as data on the R&D activities of companies in Ireland from the Annual Business Survey of Economic Impact (ABSEI). In their analysis, the team examined the R&D activities of 2,369 companies between 2000 and 2017 as well as all relevant measures employed in parallel by the R&D policy of the Irish government between 2006 and 2017. With a share of 85 per cent, the tax credit programme comprises by far the most important instrument in the Irish government’s toolkit. Beyond the tax credit, companies can also apply for R&D grants and additional funding for R&D co-operation programmes at the Industrial Development Agency Ireland (IDA) or Enterprise Ireland (EI).