Effectiveness of fiscal incentives for innovation: Evidence from meta‐regression analysis

• Published date: 01 February 2021
• Author: Manu Jose,Ruchi Sharma
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2146

ACADEMIC PAPER

Effectiveness of fiscal incentives for innovation: Evidence from

meta-regression analysis

Manu Jose|Ruchi Sharma

School of Humanities and Social Sciences,

Indian Institute of Technology Indore, Indore,

India

Correspondence

Manu Jose, School of Humanities and Social

Sciences, Indian Institute of Technology

Indore, Indore, India.

Email: phd1501161002@iiti.ac.in

This article examines the microeconometric evidence on the impact of government

support for R&D and innovation. Our meta-regression analysis uses a dataset of

empirical evidence on the effects of government R&D policies on innovation and

investigates the factors that may explain the differences in the estimated effects. The

meta-analysis is structured to include both the direct and indirect government sup-

port for R&D and innovation. The estimated results reveal the heterogeneity of

empirical studies with respect to the type of incentive, data, and econometric meth-

odology used. The results indicate that the output additionality effect is on average

stronger for R&D tax incentives than subsidies. Studies that use the subsample of

high technology sector show a stronger additionality effect of fiscal incentives on

innovation. Moreover, small and medium enterprises have a stronger input

additionality effect. The results also suggest that studies considered endogeneity

issues have on average stronger additionality effect.

1|INTRODUCTION

Innovation policy measures to stimulate innovation and economic

growth have always been an important part of the science, technology

and innovation policies. Policymakers around the world introduced a

variety of policy instruments to promote private R&D and innovation,

which include loans, subsidies, grants, tax incentives, and patent-

based incentives. The rationale for these incentives is grounded in the

theory of market failure (Arrow, 1972; Bozeman & Dietz, 2001), which

occurs in R&D investments due to the gap between social and private

returns. A large empirical literature has investigated the role of fiscal

incentives on promoting R&D and firm innovation (Hall & Van

Reenen, 2000). However, empirical evidence on the effectiveness of

R&D incentives is rather mixed. This study contributes to the litera-

ture on the effectiveness of such policy instruments on promoting

innovation by employing the meta-regression analysis (MRA) tech-

nique to explain the reasons behind the differences in the empirical

results. Hence, we aim to uncover the underlying factors behind the

specific results of the empirical studies. Such an analysis is needed for

evidence-based policymaking specifically for developing and under-

developed economies that mirror the stimulation policy of the devel-

oped economies.

The economictheory and empirical evidence support theview that

innovation policy plays a vital role in firm-level innovation

(Griliches,1992). The fiscal incentive for R&D encourages firms to start

R&D or increase their R&D resources by reducing marginal costs and

increasesthe profitability of R&D investments. On theother hand, pub-

lic support for R&Dcould increase the patent filings and new product

development, as the firms could try to gain a competitive advantage in

the market by inventing new products and processes. The rationale for

the R&D support is based on the linear model of innovation, which is

founded on the assumption that R&D conducted the firm will enhance

innovation that leads to the development of new products, processes,

or services. In addition to that, competition, Foreign Direct Investment

and the changes in intellectual property regimes also encourage the

firms to engagein innovation activities (Dhanora,Sharma, & Jose, 2020;

Khachoo & Sharma, 2016; Khachoo& Sharma, 2017; Sharma, Paswan,

Ambrammal,& Dhanora, 2018).

A variety of fiscal policies were introduced to encourage private

firms to undertake R&D projects and conduct innovation activities

(David, Hall, & Toole, 2000). Fiscal incentives are provided to the firms

using direct governments supports such as grants, subsidies, and

loans, while indirect government support includes tax incentives and

patent-based incentives. Godin and Gingras (2000); and Hewitt-

Received: 5 September 2019Revised: 11 December 2019Accepted: 17 March 2020

DOI: 10.1002/pa.2146

J Public Affairs. 2021;21:e2146.wileyonlinelibrary.com/journal/pa© 2020 John Wiley & Sons, Ltd1of11

https://doi.org/10.1002/pa.2146