Better and stronger?

: theory and evidence on the effect of R&D tax credits on the trajectory of firms

Abstract

This thesis examines the effect of R&D tax credits on the trajectory of firms, in terms of R&D, performance, workforce composition and technology adoption. We elaborate a theoretical model that links the effect of R&D tax credits on firms’ decision to innovate and their differentiated effects based on firm size. Leveraging on the theoretical framework, we then estimate the causal effects of an R&D tax credits program in Portugal using rich micro-data oninnovation and firms. By combining matching with a staggered adoption differences-indifferences, we show that tax credits have strong effects on the investment in R&D-related activities, especially at the extensive margin, although the effect is concentrated while funds are being received and not thereafter. Overall, such effect on R&D translates into better firm performance on scale and productivity. Yet, its nature depends heavily on firm size: consistent with different patterns of innovation, small firms exhibit very strong scale effects while large firms see significant productivity and efficiency gains. Importantly, firms that received the tax credits exhibit structural changes, both in terms of the increased share of skilled individuals within the firm and enhanced technological adoption, a finding consistent with the relationship between R&D, innovation and skill-biased technological change.

Date of Award	25 Jan 2022
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Joana Silva (Supervisor) & Anna Bernard (Co-Supervisor)