---
title: "The Design of R&D Tax Incentive Schemes and Firm Innovation"
authors:
  - name: "Koski, Heli"
    url: "https://www.etla.fi/henkilot/koski-heli/"
    sameAs:
      - "https://twitter.com/heli_koski"
  - name: "Fornaro, Paolo"
date_published: "2022-01-19"
series: "ETLA Raportit - Reports"
series_number: "123"
issn:
  - "2323-2447"
  - "2323-2455"
jel_codes:
  - "K34"
  - "L5"
  - "O3"
  - "O31"
language: "en"
publisher: "ETLA Economic Research"
pdf_url: "https://www.etla.fi/wp-content/uploads/ETLA-Raportit-Reports-123.pdf"
keywords:
  - "R&D tax incentives"
  - "R&D investments"
  - "Innovation policy"
  - "Patents"
identifier: "https://www.etla.fi/julkaisut/id/ETLA-Raportit---Reports-123"
abstract: "Research and development (R&D) tax credits are widely employed among the OECD countries to promote business sector investments in innovation. The implementation of R&D tax credit schemes, however, varies across countries. The empirical research on the effectiveness of R&D tax incentives suggests that the strength of company responses (in R&D expenditures) to more generous tax incentives substantially differ across countries. We use data from 25 OECD countries, collected from 2010 to 2018, to explore the relationship between a set of R&D tax scheme features and innovation performance. Our estimation results show that the business sector R&D expenditure is higher among those countries that have implemented either an R&D tax credit scheme with an incremental deduction basis or a hybrid scheme with both volume-based and incremental tax relief components. The input additionality is highest when the R&D tax incentives are based on the incremental deduction. Further, the hybrid tax credit scheme positively relates to innovation output. The business sector R&D investment are higher in the countries with an R&D tax credit scheme that provides favorable treatment for SMEs or option to carry forward unclaimed R&D tax credits."
---

# The Design of R&D Tax Incentive Schemes and Firm Innovation

**Published:** 2022-01-19  
**Categories:** Publikationer, Rapporter  
**URL:** https://www.etla.fi/sv/publikationer/the-design-of-rd-tax-incentive-schemes-and-firm-innovation/

#### Abstract

Research and development (R&D) tax credits are widely employed among the OECD countries to promote business sector investments in innovation. The implementation of R&D tax credit schemes, however, varies across countries. The empirical research on the effectiveness of R&D tax incentives suggests that the strength of company responses (in R&D expenditures) to more generous tax incentives substantially differ across countries. We use data from 25 OECD countries, collected from 2010 to 2018, to explore the relationship between a set of R&D tax scheme features and innovation performance. Our estimation results show that the business sector R&D expenditure is higher among those countries that have implemented either an R&D tax credit scheme with an incremental deduction basis or a hybrid scheme with both volume-based and incremental tax relief components. The input additionality is highest when the R&D tax incentives are based on the incremental deduction. Further, the hybrid tax credit scheme positively relates to innovation output. The business sector R&D investment are higher in the countries with an R&D tax credit scheme that provides favorable treatment for SMEs or option to carry forward unclaimed R&D tax credits.

---

## Additional Information

**Kirjoittajat:** Koski, Heli - Fornaro, Paolo

**Publication Research:** No

**Kansikuva:** https://www.etla.fi/wp-content/uploads/etla-raportit-reports-123-kansi.jpg

**Lataa Pdf:** https://www.etla.fi/wp-content/uploads/ETLA-Raportit-Reports-123.pdf

**Key Words:** R&D tax incentives, R&D investments, Innovation policy, Patents

**Jel:** K34, L5, O3, O31

**Paivays:** 19.01.2022

**Sivuja:** 26

**Kieli:** en

**Sarja:** ETLA Raportit - Reports

**Sarja Nro:** 123

**Issn:** 2323-2447, 2323-2455 (Pdf)

**Saatavuus:** 2

65348

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