UL Economics Seminar 23rd March 2007, 12h00-13h00, CO-070

Prof Todd Watkins will come to UL on March 23rd to give a talk based on his paper, Absorptive Capacity and R&D Tax Policy: Are In-house and External Contract R&D Substitutes or Complements?

A Draft Version can be downloaded by clicking here

Abstract

Firms fund research and development (R&D) to generate commercializable innovations and to increase their ability to understand and absorb knowledge from elsewhere. This dual role and opposed incentive structure of internal R&D creates a significant question for both theory and R&D policy:  Is internal R&D a complement or substitute for external R&D?  We develop a model and novel technique for empirically estimating R&D substitution elasticities.  We focus on bio-pharmaceutical and software industries in California and Massachusetts, where tax credit rates changed differently over time for the two types of R&D, creating a natural experiment.  The effective tax prices for the two R&D types differ from type to type, firm to firm, state to state, and year to year.  This allows us to examine changes in the composition of firms’ R&D budgets between in-house R&D and external basic research when the relative tax prices of each category of research changes.  For a sample comprised largely of small and medium-sized firms, we find evidence of a substitute relationship.