Input additionality in the Norwegian R&D tax credit scheme

Tax incentives have become an increasingly popular policy tool over the last decades. Norway introduced an R&D tax credit scheme, called SkatteFUNN, in 2002. The degree of input additionality, i.e. to what extent the scheme induces firms to invest more in R&D than they otherwise would have done, is critical when evaluating the overall efficiency of the scheme. Identifying this effect in a non-experimental setting, where access to the scheme is in principle universal, is demanding. We discuss in detail the identification problems involved. Using a difference-in-difference regression approach, comparing growth in R&D investments for firms above and below the 4 million tax credit cap, our findings suggest that the Norwegian R&D tax credit scheme has stimulated firms to increase their R&D investments. The estimated effect seems to be driven by firms that did very little R&D prior to the introduction of the tax credit scheme was introduced. The size of the effect is hard to assess with any precision, but the scheme seems to induce about two kroner additional R&D per krone spent as tax subsidy.

Acknowledgement : This is a part of Statistics Norway's evaluation of the Norwegian R&D tax credit scheme, financed by the Norwegian Research Council.