Aggregate R&D growth

The SkatteFUNN reform was to a large extent

motivated by low R&D activity in Norwegian industry and the goal of the government to increase R&D investments in the Norwegian economy from about 1.6

% of GNP to about 3 % of GDP by 2010. A successful

scheme should therefore show up in aggregate R&D investments. This is hardly the case. As seen in Figure 5.5, nominal intramural R&D investments have only had a slight increase, and it has not at all kept up with the economic growth rate. Extramural R&D has actually fallen, see Figure 5.6.

However, looking at the size of aggregate R&D tax credits relative to aggregate R&D, it also becomes clear that it would take an extreme degree of additionality for this policy instrument to move aggregate industrial R&D investments by much.

Figure 5.5. Intramural R&D for firms with ore than 10 employees

0 2000 4000 6000 8000 10000 12000 14000 16000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Million NOK Other sources

Own finance Direct subsidies R&D tax credit

Figure 5.6. Extramural R&D for firms with more than 10 empolyees

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Million NOK

Other sources

From Universities and institutes SkatteFUNN

introduced for 2002

SkatteFUNN universal from

2003

SkatteFUNN introduced for

2002

SkatteFUNN universal from

2003

Figure 5.7. Intramural R&D for firms with 10-19 employees

0 200 400 600 800 1000 1200 1400 1600

1999 2000 2001 2002 2003 2004 2005

Year

Million NOK Other sources

Own finance Direct subsidies SkatteFUNN

Figure 5.8. Extramural R&E for firms with 10-19 employees

0 100 200 300 400 500 600

1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Million NOK

Other sources

From Universities and institutes

Given that the tax scheme is restricted to R&D investments below 8 million, it may be more relevant to look at the aggregate R&D investments for small firms. Figure 5.7 shows aggregate intramural R&D for firms with 10-19 workers. Here, one can clearly see growth in the R&D investments from 2001 to 2003.

Thereafter investments level off, but that is to be expected when firms have reached a level of R&D that is adapted to the subsidy. However, it is also evident from Figure 5.7 that the growth in R&D from 2001 to 2003 was part of a trend starting before SkatteFUNN was introduced, and it is hard do see a pattern at all in extramural R&D investments for small firms, see figure 5.8. In any case, SkatteFUNN is only one of several changes in the economic climate that may affect firms’

R&D investments. A causal effect of the scheme can therefore not be identified looking only at macro data, and we will now turn to a microeconometric analysis.

SkatteFUNN introduced for

2002

SkatteFUNN universal from

2003

SkatteFUNN introduced for

2002

SkatteFUNN universal from

2003

6.1. Short term additionality

We start out with a simple descriptive relationship where firms’ R&D investments are explained by their sales, direct R&D subsidies, a fixed effect capturing their underlying inclination to invest in R&D, year dummies capturing common macroeconomics shocks and firm specific temporary shocks such as ideas for new products and processes.

(6.1)

Including firm specific fixed effects, ηi, implies that we are explaining deviations from each firm’s average level of R&D. It also means that we control for all differences across firms, and hence between firms above and below the cap, that are constant over the estimation period. A change in the R&D subsidy regime like SkatteFUNN should be picked up by the year dummies as firms should do more R&D than “usual”

when there is a generous subsidy regime.

Our sample consists of firms that are present in the R&D surveys and that have reported positive R&D in at least one year prior to the introduction of SkatteFUNN and that never have reported real R&D investments above 40 million NOK. Observations with R&D intensity (R&D/sales) above 5, and observations with zero R&D in the R&D surveys, but a positive R&D tax credit in the tax record are excluded. Observations that lack variables used in the analysis are also excluded.

The sample period is 1993 to 2005.

The estimated coefficients are reported in table 6.1., column (1). 1993 is the base year and the year dummies represent differences in average R&D investments compared to 1993. We see that there is substantial year-to-year variation in average R&D investments, even when changes in sales are controlled for. However, there is no clear shift in the level of R&D from 2002 onwards, when SkatteFUNN was introduced. This is more clearly brought out in column (2), comparing pre- and post-SkatteFUNN years using only one coefficient.

Conditioning on sales, subsidies and firm specific levels of R&D investments, firms do not seem to invest significantly more in R&D after SkatteFUNN was introduced. This is consistent with the modest growth in aggregate R&D investments reported in figure 1.

Table 6.1, column (3) takes into account that only firms that would invest less than 4 million NOK have an incentive to increase their R&D investments in response to SkatteFUNN. Hence, equation 6.1 is expanded by interaction terms between the year dummies and a dummy for average pre SkatteFUNN R&D being below 4 million. This specification corresponds to the semi-structural equation (3.3) above with common time specific error terms and with the user price exchanged for a dummy variable that is one if a firm is eligible for a tax credit on their marginal R&D investment. We also include direct subsidies to R&D as an explanatory variable.

(6.2)

As explained we do not know for sure whether a firm is eligible for a subsidy on their marginal R&D. This is because we do not know how much R&D each firm would do in absence of SkatteFUNN. We have

experimented extensively with building models to predict R&D investments in absence of SkatteFUNN, and we have concluded that it is difficult to do much better than using the latest R&D observation prior to SkatteFUNN although there is some information in earlier R&D observations also. As explained in chapter 3.1, however, using only the latest R&D observation will imply a regression-to-the-mean bias. To avoid this, we base the classification on the average level of R&D prior to SkatteFUNN. This predicts future R&D almost as well as using the latest observation only. Hence, D^{below cap} in equation 6.2 is one if a firm on average invested less than 4 million in R&D in those of the years 1993 to 2001 when it was observed.¹¹

11 The comparison is based on real R&D investments in 2003 NOK.

See chapter 4.