Corporate returns to subsidised R&D projects: Direct grants vs. tax credit financing

Abstract

According to theory, direct R&D grants should be used for projects with low private returns, high social returns and high risk. R&D tax credits, on the other hand, allow firms to choose projects freely according to their private returns. Building on the standard R&D capital model, I develop a framework for estimating private returns to R&D projects with different types of funding. I apply the framework to estimate the corporate returns to subsidised R&D projects in Norway. Consistent with theory and a high quality grant allocation process, I find that projects funded through direct grants have private returns that are not significantly different from zero and with high variance, while the return to R&D projects financed by tax credits is just slightly below the return to R&D projects financed by own funds. The latter two return estimates are 16% and 19% respectively. I find that SMEs and small R&D performers have somewhat higher returns to R&D than larger firms. The overall return estimate across all types of finance is 15%. This is in line with recent meta-regression results in the international literature.