An examination of the influence of tax incentives and financial reporting on corporate research and development expenditures

Research and development has been shown to be one of the most important components for a successfully innovative company, industry or country. Private corporations contribute a substantial portion of the total inventive activity in a country. Three studies are presented that examine the impact of external influences on R&D. Two studies investigate the role of tax incentives in determining corporate R&D spending. The first study uses U.S. firms to investigate the impact that one tax incentive may have on the effectiveness of another by measuring how the investment tax credit and the R&D tax credit together influence corporate investment decisions for research and capital. Second, the influence of R&D tax credits is studied internationally because enhanced global competitiveness motivates countries to implement these incentives. Firms from the major industrialized nations (G7) comprise the sample because four of the countries utilize a tax credit incentive for R&D while the other three do not. Firms from the G7 are also examined in the third study that addresses the influence of financial reporting treatment on R&D expenditures. Some countries require immediate expensing of all R&D costs, and others allow portions of the costs to be capitalized. Each of the papers uses a regression methodology dud includes indicator variables for the external influences and other non-tax control variables that influence corporate spending decisions.; The results indicate that the external influence of an R&D tax credit has a significant positive impact on the R&D spending of corporations. This finding has meaningful implications to legislators in governments internationally as countries search for ways to enhance technology and innovation in increasingly competitive global markets. However, the findings also caution against developing policies individually without considering the impact of the tax system as a whole. The study performed in the U.S. demonstrates that the presence of an alternative credit for capital investment was related to lower levels of research spending. The research also leads to the conclusion that financial reporting treatment influences, the R&D spending by corporations. Finns in countries dud allow some form of capitalization spend more on R&D than their counterparts in countries that require immediate expensing.