Evaluation of tax incentives aimed at stimulating R&D projects in the business sector

Commissioned by: Ministry of Science, Education and Sports 
Project duration: February – May, 2011 
Project manager(s): Sandra Švaljek, PhD / Zoran Aralica, PhD

Brief outline: 
The goal of the project was to evaluate the impact of tax incentives on companies’ R&D activity. The main research question was whether the introduction of tax incentives had a positive impact on a firm’s decision to invest in, or on the amount invested in an R&D activity. In order to estimate the impact correctly, the evaluation took the following critical issues into account: 
  • tax incentives may crowd a private R&D investment out. Therefore, one should ensure that only an R&D activity in excess of what it would have been absent the incentives, be considered a positive effect (the principle of additionality); 
  • one should be able to disentangle the impact of the tax incentives from other factors that may have had an impact;  
  • what firms report in surveys may not match the administrative records, which dictates the use of both types of data sources if possible;  
  • one should account for the time lag required for any incentive to take effect; in addition, companies’ claims and the authority’s approvals do not occur simultaneously;  
  • as the companies claiming and using tax incentives may be systematically more willing to invest in R&D, irrespective of the existence of the incentives, the endogeneity/self-selectivity issue has to be addressed, to the extent that the data at hand enables.