Tax incentives and R & D activity: Firm-level evidence from Taiwan

This paper investigates the effect of tax incentives on R & D activities in Taiwanese manufacturing firms. The propensity score matching (PSM) estimates show that recipients of R & D tax credits appear on average to have 53.80% higher R & D expenditures than that they do without receiving tax credits, while there is no significantly higher growth rate of R & D expenditure. This study further employs the panel instrumental variable (IV) and generalized method of moment (GMM) techniques to control for endogeneity of R & D tax credits and firm heterogeneity in determining R & D expenditure. The R & D tax credit is witnessed to exhibit a significantly positive influence on R & D expenditure and its growth, especially for electronics firms. The marginal effect is moderate, ranging from 0.094 to 0.120. Specifically, the R & D elasticity concerning tax credits tends to increase gradually along with the approaching expiration of R & D tax credits measure, lending a supportive view on its efficacy.