Nicholas Bloom Rachel Griffith John Van Reenen

1. Do R&D tax credits work? Evidence from an international panel of countries 1979-94.Work in Progress – April 1998 Nicholas Bloom Rachel Griffith John Van Reenen

2. Policy Issues • Substantial annual cost of current R&D tax measures: • $1bn estimated annual revenue loss from R&D tax credit in USA. • $1bn estimated annual revenue loss from R&D tax measures in EU. • Japan and Australia also have tax credits. • Other countries such as the UK and Germany considering an R&D tax credit.

3. Economic Issues • Early studies indicated that R&D was not very sensitive to R&D tax incentives • More recent studies indicate a much greater response. However, one country studies: • problems disentangling tax policy and macro shocks • within firm variation in after tax price endogenous (?) • generalisable to other countries (?)

4. What’s new in this paper? • Extend analysis to more countries • R&D tax changes as natural experiments • Appropriate R&D data • recorded on the basis of where it is conducted • consistent definition across countries • not tax data so not so susceptible to relabelling • Business R&D data by source of funding

5. Tax Data • New data set developed at the IFS which constructs a “user cost of R&D”, reflecting • general features of the tax system • treatment of cross border flows • special treatment of R&D investment including tax credits and accelerated depreciation allowances • Eight countries studied over 16 year, 1979-1994. • Five with some kind of R&D tax promotion: Australia, Canada, France, Japan, and the USA • Three without any major R&D tax promotion: Italy, Germany, and the UK

6. The User Cost of R&D(without inflation or exchange rates)

7. User cost of R&D

8. Tax variation in user cost

9. R&D data • OECD data on R&D. • business conducted R&D (BERD) • manufacturing sector • government survey data based on common Frascati definition. • deflated by 50% wages and 50% GDP deflator.

10. Manufacturing BERD/ Manufacturing output USA Japan Germany France UK Canada Australia Italy

11. R&D data • OECD MSTI data on the funding breakdown of business conducted R&D (BERD) into: • domestic business financed BERD • foreign business financed BERD • government financed BERD

13. Table 1 from paper

14. The model lag business funded business R&D user cost of R&D country specific effect output time specific effect

15. Relocation? • Is the impact of R&D tax credit only to change level of domestic R&D? • Is there also an impact through relocating R&D done by multinational firms?

16. Adding in foreign tax price domestic user cost foreign user cost indicates in favour of relocation

17. Measuring foreign tax price Foreign Direct Investment from country i to country j User cost of R&D for investment from country i to country j

18. Table 2 from paper

19. Conclusions • Using tax changes as exogenous changes to the user cost of R&D we find an impact elasticity of around -0.1 and long-run elasticity or around -1.0 • Evidence suggests that the location of R&D may be affected by tax-induced changes to the cost of R&D, maybe some tax rivalry