Fact of the Week: Portuguese R&D Tax Incentives Spurred Investments in Productivity-Boosting Assets by 0.8 to 2.4 Percent Of Firms’ Total Assets

Source: Rita Bessone Basto, Ana Martins, and Guida Nogueira, “The Impact of R&D Tax Incentives in Portugal,” Office for Strategy and Studies of the Ministry of Economy and Digital Transition, January, 2021

Commentary: Innovation is important for long-run economic growth, but firms are likely to underinvest in R&D because they don’t capture all of the returns; many of the benefits spill into the public sphere. Public support for R&D is critical to bridge the gap in incentivizing technological progress. Three Portuguese economists examined the investment impact of tax incentives for “intangible investments,” another term for non-physical investments that increase productivity, such as human capital, software, and innovation. Using data on more than 8,000 firms from 2005 to 2015, the authors found firms that made no previous intangible investments increased their spending in that area by between 0.8 percent and 1 percent of total assets, whereas firms that had already made intangible investments saw their spending increase by between 1.1 percent and 1.3 percent of total assets. The effect of the credit was strongest with firms that already had a propensity to invest in R&D—driving increases in their spending on intangible investments by 2.2 percent to 2.4 percent of total assets. These results not only show the positive impact government involvement can have on innovation, but also that the positive effects of increased R&D investment produce increasing returns with additional scale.