Source: William McShane and Merih Sevilir, “R&D Tax Credits and the Acquisition of Startups,” IWH Discussion Papers, No 15/2023 (July 2023): 1-28.
Commentary: In a recent working paper for the Halle Institute for Economic Research, William McShane and Merih Sevilir analyzed the relationship between usage of R&D tax credits and their relationship to M&A activities. The study looked at 3,587 firms between 1990 and 2015. The authors explain that established firms do not just take advantage of R&D tax credits to increase their own internal R&D. Eligibility for the credits also induces the established firms to acquire venture capital-backed start-ups. The study examines how start-up acquisitions assist in more effective allocation of R&D capital and labor.
The motivation behind such acquisitions has to do with the size constraints that often characterize relatively smaller start-ups. Some start-ups do not necessarily derive a direct benefit from R&D tax credits due to their smaller income streams. When established firms acquire these start-ups, they take advantage of the tax credit by allocating some of their own R&D expenditures to the start-ups. Additionally, the authors note that acquisitions serve as a more efficient way for the acquiring firm to increase their R&D labor. Thus, the acquiring firm provides a supporting role for the R&D-intensive activities of the newly acquired start-ups.
