The impact of R&D grants and R&D tax credits on firms’ R&D and economic performance: Are indigenous and foreign-owned firms different?

Helena Lenihan1, Kevin Mulligan1*, Justin Doran2, Olubunmi Ipinnaiye1, Pablo Garrido-Prada1, Christian Rammer3

1: Department of Economics, Kemmy Business School, University of Limerick, Limerick, Ireland

2: Spatial and Regional Economics Research Centre, Department of Economics, Cork University Business School, University College Cork, Cork, Ireland

3: Department of Industrial Economics and International Management, Centre for European Economic Research (ZEW), L7, 1, D-68161, Mannheim, Germany

* Author delivering the presentation (kevin.mulligan@ul.ie)

Abstract

In economies throughout the world, public funding is seen as providing an important stimulus for firm-level Research and Development (R&D). R&D grants and R&D tax credits are the most common forms of policy intervention targeted at firms' R&D. Firm-level investment in R&D is an important driver of firms’ performance, national competitiveness, and economic growth. However, the nationality of firm ownership is an issue that has received little attention when examining the impact of public funding for R&D. Public funding may impact the R&D and performance of indigenous and foreign-owned firms (mostly Multinational Enterprises-MNEs) in different ways. This has clear policy implications regarding the allocation and impact of public R&D funding at the firm level. Ireland provides an excellent locale in which to examine this issue. Ireland has had a pronounced industrial policy focus on attracting Foreign Direct Investment (FDI) since its First Programme for Economic Expansion in 1958. This has led to a dualism in the Irish economy between foreign-owned and indigenous firms. While many studies highlight the benefits of FDI-led industrial policy, the overriding presence of FDI in policy implementation led to the neglect of indigenous firms, and a heavy reliance on FDI can lead to increased vulnerability to economic shocks. Therefore, understanding what impact R&D grants and R&D tax credits have on firms’ R&D and economic performance across these two distinct parts of the economy is an avenue of research meriting investigation.

In light of the above, this study poses the following research question: What impact do R&D grants and R&D tax credits have on indigenous and foreign-owned firms’ R&D and economic performance?

To understand the impact of R&D grants and R&D tax credits on indigenous and foreign-owned firms’ R&D and economic performance, the study constructs a rich panel dataset which tracks over 10,000 firms based in Ireland from 2007-2014. The Annual Business Survey of Economic Impact (ABSEI) provides information on firms’ R&D expenditure, as well as a number of firm performance measures such as turnover, exporting, Gross Value Added (GVA) and employment. Crucially for this study, ABSEI distinguishes between foreign-owned and indigenous (Irish-owned) firms. Ireland has two major funding agencies which provide R&D grants to firms, Enterprise Ireland and Industrial Development Agency (IDA) Ireland. While Enterprise Ireland supports Irish-owned firms, IDA Ireland focuses on supporting foreign-owned firms. Finally, the Irish Revenue Commissioners administer the R&D tax credit programme, which can be availed of by both indigenous and foreign-owned firms. Detailed firm-level data from each agency/organisation is merged with ABSEI, to construct a comprehensive dataset of the public R&D support available to firms.

Preliminary analysis indicates that R&D tax credits stimulate significant additional R&D investment in both foreign-owned and indigenous firms, while R&D grants have only a limited impact on firm-level R&D. However, R&D grants appear to be much more effective at driving firm performance. Foreign-owned firms that received R&D grants experience significantly higher turnover growth and export growth than similar foreign-owned firms that did not receive a R&D grant. For indigenous firms, this finding is even more pronounced, with additional impacts on GVA growth. In contrast, R&D tax credits have a more modest impact on firm performance.

Acknowledgements

This research has emanated from research conducted with the financial support of Science Foundation Ireland (SFI) under Grant number 17/SPR/5328.

1. Kevin Mulligan is a Post-Doctoral Researcher based at the Department of Economics, Kemmy Business School, University of Limerick, Ireland, and works as part of a research group led by Prof. Helena Lenihan. Kevin is currently working on a research project funded by Science Foundation Ireland (Grant Number: 17/SPR/5328), titled “Evaluating the impact of science policy on the economy and society: A national evaluation and international benchmarking of science policy in Ireland”. This paper, co-authored with Helena Lenihan (University of Limerick), Justin Doran (University College Cork), Olubunmi Ipinnaiye (University of Limerick), Pablo Garrido-Prada (University of Limerick) and Christian Rammer (ZEW, Germany) forms part of this larger SFI-funded project. Kevin’s research interests include firm-level R&D, science and innovation policy evaluation and policy mix.