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Innovation Fact of the Week: In UK, £1 of R&D Tax Credit Spurs £1.70 of Business R&D

R&D Credit

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The U.S. Congress recently made permanent the Research and Development Tax Credit and expanded it for small and medium-sized businesses. Judging by the experience of the United Kingdom, which enacted a similar policy in 2008 for businesses with less than £86 million in assets, policymakers in the United States can now expect to see a significant increase in innovation.

Scholars from the London School of Economics recently examined business R&D data covering more than two million U.K. companies between 2009 and 2011. Their findings show that with the tax credit, private R&D roughly doubled, and patenting output increased by about 60 percent. They went on to estimate that every £1 worth of credit stimulated £1.70 worth of R&D activity.

The scholars based their estimates on trends they identified in the relationships between firm asset sizes, R&D expenditures, and patent outputs. They discovered that the statistical relationships between these variables were different for firms with less than £86 million in assets than they were for firms with more than £86 million in assets—and these differences can be explained by the fact that the smaller firms were able to take advantage of the R&D credit while the larger firms were not.

Read last week’s Innovation Fact of the Week.

Photo Credit: GotCredit via Flickr

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About the author

John Wu is an economic research assistant at ITIF His research interests include green technologies, labor economics, and time use. He graduated from the College of Wooster with a bachelor of arts in economics and sociology, with a minor in environmental studies.