Does an R&D Tax Credit Affect R&D Expenditure? The Japanese R&D Tax Credit Reform in 2003

42 Pages Posted: 13 Nov 2013

See all articles by Hiroyuki Kasahara

Hiroyuki Kasahara

University of British Columbia, Vancouver School of Economics

Katsumi Shimotsu

Queen's University - Department of Economics

Michio Suzuki

Tohoku University

Date Written: October 31, 2013

Abstract

To what extent does a tax credit affect firms’ R&D activity? What are the mechanisms? This paper examines the effect of R&D tax credits on firms’ R&D expenditure by exploiting the variation across firms in the changes in the eligible tax credit rate between 2000 and 2003. Estimating the first-difference equation of the linear R&D model by panel GMM, we find the estimated coefficient of an interaction term between the eligible tax credit rate and the debt-to-asset ratio is positive and significant, indicating that the effect of tax credit is significantly larger for firms with relatively large outstanding debts. Conducting counterfactual experiments, we found that the aggregate R&D expenditure in 2003 would have been lower by 3.0-3.4 percent if there had been no tax credit reform in 2003, where 0.3-0.6 percent is attributable to the effect of financial constraint, and that the aggregate R&D expenditure would have been larger by 3.1-3.9 percent if there had been no cap on the amount of tax credits, where 0.3-0.8 percent is attributable to relaxing the financial constraint of firms with outstanding debts.

Keywords: R&D, tax credit, financial constraint, Japan

JEL Classification: D220, H250, H320, K340, O310, O380

Suggested Citation

Kasahara, Hiroyuki and Shimotsu, Katsumi and Suzuki, Michio, Does an R&D Tax Credit Affect R&D Expenditure? The Japanese R&D Tax Credit Reform in 2003 (October 31, 2013). Available at SSRN: https://ssrn.com/abstract=2353300 or http://dx.doi.org/10.2139/ssrn.2353300

Hiroyuki Kasahara (Contact Author)

University of British Columbia, Vancouver School of Economics ( email )

6000 Iona Dr.
Vancouver, British Columbia BC V6T 1L4
Canada

HOME PAGE: http://https://faculty.arts.ubc.ca/hkasahara/

Katsumi Shimotsu

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

Michio Suzuki

Tohoku University ( email )

Kawauchi, Aoba-ku
Sendai, 980-8576
Japan

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