Abstract
As we discussed in Chapter 1, governmental support of innovation can be either direct or indirect. The primary indirect mechanisms used by government to stimulate innovation have historically been tied to tax policies. However, the descriptive data in Chapter 6 suggested that Federal tax incentives as a motivation for engaging in collaborative research with a university was not generally viewed as an effective policy tool.
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Notes
This section draws from Bozeman and Link (1984, 1985).
See Committee for Economic Development (1980).
For example, formula grants to aid public education are sometimes quite complex and yet free from such controls. For an analysis of one such program and the problems of measuring its economic effects, see Leyden (1992).
See, for example, Surrey (1973).
See, for example, Cole (1971).
See Surrey (1969).
See, for example, Brimmer and Company (1979).
See Bozeman and Link (1983) and Link, Tassey, and Zmud (1983) for a more detailed discussion of this so-called make versus buy issue.
The National Science Foundation (NSF) data reporting definition of R&D is basic and applied research in the sciences and engineering and the design and development of prototypes and processes. This definition excludes quality control, routine product testing, market research, sales promotion, sales service, research in the social sciences or psychology, and other nontechnological activities or routine technical services. Based on the IRS regulations, R&E is defined as expenditures which represent NSF-defined research and development costs in the experimental or laboratory sense. The term R&E generally includes all costs incident to the development of an experimental or pilot model, a plant process, a product, formula, and invention or a similar property. The term is not intended to refer to ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotions (KPMG, 1990).
The term depreciation refers to the accounting process of systematically allocating the cost of a long-lived asset over its useful life.
See, for example, Kaplan (1975).
See Kaplan (1975).
Since 1977, Treasury Regulation 1.861–8 has required U.S. multinational firms to allocate some of their domestic R&E expenditures against income from foreign sources. The rationale is, if a firm spends money for R&E in the U.S. and the resulting products or processes are sold abroad, then a portion of these R&E costs should be allocated against foreign sales. The combined effect of this regulation and the tax laws governing foreign income is to increase the effective tax rate on foreign income and perhaps to encourage multinational firms to export a portion of their R&E overseas. See Ruscio (1981).
See Eisner, Albert, and Sullivan (1984).
According to Baily and Lawrence (1990) this credit reduced, on an after-tax basis, the cost of qualified R&E by 9.3 percent.
See U.S. General Accounting Office (1989). The term company-financed R&D refers to those R&D expenditures financed internally, as opposed to those being financed through governmental contracts or grants.
The remainder of this section draws from Hankins and Scheirer (1989), Wozny (1989), U.S. General Accounting Office (1989) and U.S. Department of Commerce, Office of Technology Policy (1990). According to Baily and Lawrence (1990), the rate reduction to 20 percent coupled with a lowering of corporate income tax rates implied that the credit, on an after-tax basis, reduced the cost of qualified R&E from 9.3 percent to 6.7 percent in 1987 and to 6.1 percent in 1988.
The National Advisory Committee on Semiconductors has recommended that the tax credit be extended to cover commercial R&D conducted in consortia, such as SEMATECH. See Congressional Budget Office (1990).
Again, according to Baily and Lawrence (1990) the after-tax cost reduction fell to 4 percent.
See U.S. General Accounting Office (1989).
See KPMG (1990) for examples.
For examples see KPMG (1990).
For a discussion of the importance of making the credit applicable to startup companies, see Swain (1988).
An empirical analysis of the relative incentives established by each of these aspects of ERTA is in Link and Tassey (1987). See also Barth, Cordes, and Tassey (1984).
Mansfield notes that these estimates may approximate the expected long-run impact from the credit. A reasonable estimate of the effective tax credit is 6 percent. Eisner, Albert, and Sullivan (1983) and U.S. General Accounting Office (1989) estimate the effective rate to be closer to 4 percent. If the price elasticity of the demand for R&D is 0.3, as suggested by those studies so referenced, then a 1.8 percent annual increase in R&D appears to be reasonable. Mansfield (1986) also notes in a related review article that others have found that the credit had only a modest impact on R&D spending of between 0.4 percent and 0.8 percent per year. See, Charles River Associates (1985).
See Altshuler (1988) for a discussion of the calculation of effective rates under alternative fmancial scenarios.
See Gravelle (1985) and Collins (1986), too.
See Papadakis (1990) for empirical support. In fact, her analyses show that the upward shift began in the 1977–1978 period.
See U.S. Department of Commerce, Office of Technology Policy (1990).
See U.S. General Accounting Office (1989).
Quoted from U.S. Department of Commerce, Office of Technology Policy (1990).
See Link (1987) for a review of this literature.
We know that firm size is not a prerequisite for success in R&D beyond a modest threshold level (Link, 1980), and we know that larger firms, generally those with corporate assets greater than $250 million, took greater advantage of the R&D tax credit than did smaller firms (Eisner, Albert, and Sullivan, 1984; U.S. General Accounting Office, 1989).
Mansfield (1980) and Link (1981) have verified this correlation. Also, Bozeman and Link (1984, 1985) proposed a tax credit for cooperative research investments (cooperative research occurs at the basic end of the R&D spectrum). Link and Bauer’s (1989) econometric analyses demonstrate the productivity growth increases associated with cooperative research endeavors.
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Leyden, D.P., Link, A.N. (1992). Policy Initiatives to Support Innovation. In: Government’s Role in Innovation. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-2936-7_7
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DOI: https://doi.org/10.1007/978-94-011-2936-7_7
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