Interest rates, R&D investment and the distortionary effects of R&D incentives

Keywords

COMPUSTAT; Finance; Grants; R&; D; Tax credits

Abstract

This paper conducts the first analysis of how interest rates are related to firms’ allocation of investment between R&D and non-R&D activities and how R&D incentives alter this relationship. It theoretically predicts that if firms receive incentives mostly in the form of grants and subsidies that reduce their dependence on external finance, their share of R&D spending increases (decreases) during a credit tightening (easing). Conversely, if tax credits are the primary incentive, firms decrease (increase) their share of R&D spending during a credit tightening (easing). The paper demonstrates empirical support for these predictions by using firm-level financial and sector-level R&D incentives data and a unique methodology that focuses on the within firm allocation of investment.

Publication Date

1-1-2019

Publication Title

European Economic Review

Volume

111

Number of Pages

191-210

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.euroecorev.2018.09.006

Socpus ID

85055518879 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/85055518879

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