Tax Incentives or Subsidies for R&D?

UNU-MERIT Working Paper #2012-056

52 Pages Posted: 25 Sep 2013

See all articles by Isabel Busom

Isabel Busom

Universitat Autonoma de Barcelona

Date Written: July 1, 2012


This paper studies whether firms’ use of R&D subsidies and R&D tax incentives are correlated to two sources of underinvestment in R&D, financing constraints and appropriability. We find that financially constrained SMEs are less likely to use R&D tax credits and more likely to obtain subsidies. SMEs using legal methods to protect their intellectual property are more likely to use tax incentives.

Results are ambiguous for large firms. For both having previous experience in R&D increases the likelihood of using tax incentives, while it reduces the likelihood of using exclusively subsidies, suggesting that the latter induce entry into R&D. Results imply that direct funding and tax credits do not have the same ability to address each source of R&D underinvestment, and that on average subsidies may be better suited than tax credits at least for SMEs. From a policy perspective these tools may be complements rather than substitutes.

Keywords: R&D, tax incentives, subsidies, policy, innovation

JEL Classification: H25, L60, 038, O31

Suggested Citation

Busom, Isabel, Tax Incentives or Subsidies for R&D? (July 1, 2012). UNU-MERIT Working Paper #2012-056, Available at SSRN: or

Isabel Busom (Contact Author)

Universitat Autonoma de Barcelona ( email )

Departament d'Economia Aplicada
Edifici B - Campus UAB
08193 Bellaterra
+34 935 81 22 06 (Phone)
+34 935 81 22 92 (Fax)

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