Working Paper: NBER ID: w26099
Authors: Catherine Fazio; Jorge Guzman; Scott Stern
Abstract: The acceleration of start-up activity is often cited as a rationale for the R&D tax credit, a key innovation policy instrument adopted increasingly by US states over the past quarter century. While there is a strong empirical base linking the R&D tax credit to increased R&D expenditures and innovation, prior work has not provided causal evidence that this policy effects the rate of formation and growth potential of new businesses. This paper combines data from the US Startup Cartography Project with the Panel Database on Incentives and Taxes to implement a difference-in-differences estimate of the impact of the R&D tax credit on the quantity and quality-adjusted quantity of entrepreneurship. Our key finding is that the R&D tax credit is associated with a significant long-term impact on both the overall quantity and quality-adjusted quantity of entrepreneurship, with the bulk of the effect materializing more than five years after the policy is enacted. These findings stand in contrast to an analysis of the adoption of state-level investment tax credits. There, we observe no long-term impact on the quantity of entrepreneurship but a marked decline in the rate of formation of growth-oriented startups over time. Combined with other evidence regarding the efficacy of R&D tax credits in spurring innovative investment, our results shed light on the potential for this fiscal policy to also stimulate the formation of growth-oriented start-ups.
Keywords: R&D tax credits; entrepreneurship; economic development; innovation; business formation
JEL Codes: H25; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| State-level R&D tax credits (H71) | Increase in entrepreneurship (L26) |
| State-level R&D tax credits (H71) | Delayed response in entrepreneurship (L26) |
| State-level R&D tax credits (H71) | Formation of high-growth potential startups (M13) |
| State-level R&D tax credits (H71) | No enhancement in performance of startups (L25) |
| State-level investment tax credits (H71) | No long-term impact on quantity of entrepreneurship (L26) |
| State-level investment tax credits (H71) | Decline in formation of growth-oriented startups (L26) |