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R&D Tax Incentives and Manufacturing Sector R&D Expenditures M. ISHAQ NADIRI New York University THEOFANIS P. MAMUNEAS University of Cyprus INTRODUCTION An important characteristic of R&D investment distinguishing it from other types of investment is that its output has the properties of public goods; it can be considered at least partially nonexcludable and nonrivalrous.i Indeed, the em- pirical literature provides extensive evidence that not only is the rate of return of privately funded R&D investment very high compared to that of investment in physical capital, but more importantly, its social rate of return is several times higher than its private rate of return.2 This suggests that there are substantial externalities or spillover effects associated with R&D investment. Therefore, privately financed R&D is suboptimal, and the direct or indirect support of gov- ernment is justified. Theoretically, there are many different ways to deal with market failure asso- ciated with externalities. For instance, externality-generating activities can be en- couraged by providing subsidies, by granting producers property rights and charg- ing differential prices for their use by others, by allowing firms to internalize the externality, and finally, by having the government engage directly in externality- generating activity. Indeed, in the postwar period, the U.S. government has pur- sued a combination of these policies strengthening innovators' property rights through the patent system; encouraging firms to form joint R&D ventures; di- rectly investing in R&D through companies, universities, and other nonprofit in iSee Arrow (1962), Spence (1984), and Romer (1990). 2See, for instance, Griliches (1979, 1991), Cohen and Levin (1989), Mohnen (1990), and Nadiri (1993). 53
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54 BORDERLINE CASE stitutions and government laboratories; and lastly, providing tax incentives for company-financed R&D. This chapter attempts to evaluate the contributions of R&D tax policies in particular, the expensing of R&D and the research and experimentation (R&E) credit first instituted in 1981 in promoting R&D investment in U. S. manufac- turing industries. Three specific public policy issues are addressed: 1. How much lower would private R&D investment have been if the R&E credit were abolished and if R&D expenditures were treated as amortiz- able capital expenditures similar to expenditures on plant and equipment? . What are the social benefit-cost ratios of these R&D tax policies over the period of the study? 3. Finally, what appear to be the potential shortcomings of the R&E tax credit and how might it be made more effective? To answer these questions, we estimated a cost function, taking into account the level of output, prices of the traditional inputs such as labor and private capi- tal, the rental price of company-financed R&D capital, and the capital stocks of publicly financed R&D.3 Cost and factor demand functions for the private factors of production including industry-financed R&D capital stock are estimated jointly.4 In this framework, input demands are interrelated; changes in the price of one input affect demand for other inputs. For example, changes in tax incen- tives for physical plant and equipment affect not only the demand for physical capital but also the decision to invest in R&D activities. Similarly, changes in the price of industry R&D capital may affect the demand for labor and physical capi- tal. These cross-price elasticities are important in addition to each factor's price elasticities in evaluating the effects of public R&D policies. The model is estimated using a sample of 15 manufacturing industries, which constitute the manufacturing sector, as reported in Table 3.1. These industries perform the bulk of R&D in the U.S. economy. Data on the quantities and price indices of output, labor, physical capital, and intermediate inputs were obtained from the Bureau of Labor Statistics, and R&D data were obtained from the Na- tionalScienceFoundation.5 The estimation period covers the years 1956to 1988. Using the estimates of the model, it is possible to calculate the output and price elasticities of the demand for various inputs and to measure the effects of govern- ment R&D tax and incentive policies on the costs and production structure of U.S. manufacturing industries. 3For specification and estimation of the model, see Mamuneas and Nadiri (1996). 4Two publicly financed R&D capital stocks also enter the cost function as shift variables and thereby affect demand for labor, capital and private R&D. One type of publicly financed R&D is performed inside a given industry, the second type is all other publicly financed R&D performed outside the particular industry. The latter captures potential spillover benefits from government-financed R&D activities. These publicly financed R&D stocks and the disembodied technical change have nonneutral effects on the structure of the industry cost and demand for inputs. (See Mamuneas and Nadiri, 1996) 5A description of the data is available upon request.
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 55 TABLE 3.1 Industry Classification Code SIC Codes Industry 20 20 Food and kindred products 26 26 Paper and allied products 28 28 Chemicals and allied products 29 29 Petroleum refining and related industries 30 30 Rubber products 32 32 Stone, clay, and glass products 33 33 Primary metals 34 34 Fabricated metal products 35 35 Machinery 36 36 Electrical equipment 37 37 Transportation equipment 38 38 Scientific instruments 40 22, 23 Textiles and apparel 41 24, 25 Lumber, wood products, and furniture 42 21, 27, 31, 39 Other manufacturing industries EFFECTS OF R&D TAX POLICY ON COST STRUCTURE Historically, the federal government, recognizing the importance of R&D investment for economic growth and international competitiveness, has treated R&D investment more favorably than other kinds of investments. The federal government basically uses two types of tax policy instruments to stimulate R&D expenditures. One, in place since 1954, is the immediate deductibility provision of company-financed R&D expenditures. The second is the direct R&E tax credit introduced by the Economic Recovery Tax Act of 1981. The 1981 Tax Act, in addition to introducing the Accelerated Cost Recovery System for investment in plant and equipment, introduced an incremental R&E tax credit for qualified research expenditures. Firms were eligible to claim either 25 percent credit if their R&D expenditures exceeded the average of R&D spend- ing of the three previous years or half of the credit if they were above twice the base. This credit was initially intended to expire at the end of 1985 but was renewed at a rate of 20 percent for two additional years in the Tax Reform Act (TRA) of 1986.6 To estimate the effect of these two R&D tax incentives on the price of R&D, assume that a firm incurs $1 of R&D expenditures in excess of its R&D expendi- tures in the past three years. With an incremental tax credit of 25 percent, this means that the cost to the firm will be reduced by $1 x 0.25 = $0.25. However, the $1 increase in R&D expenditures decreases the incremental R&E tax credit for the next three years by $0.33 x 0.25 = $0.083 for each year. Thus, with a 6The credit has from then renewed at a rate of 20 percent. See Hall (1992) for a brief history of the credit rate, qualified expenditure rules and base levels during 1981-1991.
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56 BORDERLINE CASE discount rate of 10 percent the net tax reduction of a $1 increase in R&D expen- ditures is $0.25 - [~;3=~$0.083/~1 + 0.10i] = $0.045, and the actual posttax cost of the expenditures is $1 - $0.045 = $0.955. Consider now the effect of the immediate deductibility provision of R&D expenditures. Suppose that the corporate income tax rate is 46 percent; then the tax reduction is $0.46, and the after-tax cost of R&D expenditures $1 - $0.46 = $0.54. By combining these two incentives, the after-tax cost of $1 of R&D ex- penditures is $1 - $0.46 - $0.045 = $0.495 (i.e., about one-half its pretax cost). For firms to benefit from tax incentives, they must have sufficient taxable income. In addition, in the case of incremental R&E tax credit, Eisner et al. (1984) have estimated that in 1981 and 1982, about 25 and 35 percent, respectively, of manufacturing firms did not claim the credit either because they did not increase their R&D expenditures over the base or because they did not have sufficient federal income tax liabilities. In some instances the incremental character of the credit might even make the effective rate negative (Eisner et al., 1984; Hall, 1992~. In the absence of information, we assume that the firms in our sample of indus- tries have enough tax liabilities and that the increase in their R&D expenditures was greater than the base but less than twice the base. Under the above assumptions, let tic be the corporate income tax rate, 5 the incremental R&E tax credit rate, and ~ a parameter taking values of 1 if there is immediate expensing of R&D expenditures but values less than 1 otherwise.7 The after-tax cost of R&D expenditures is given by qR(1 - xAc- v;), where qR is the acquisition price, v = [1 - );3=~ 0.33 /~1 + Hi ~ and r is the discount rated Let the after-tax rental price of R&D capital services (PR) be defined by the equality between the posttax cost of acquisition and the present value of future rentals (Hall and Jorgenson, 1967~. Then the posttax rental price of company- financed R&D capital is given by PR qR(r + ~R)~1 -/`UC-vie), (1) where r is the discount rate and OR is the depreciation rate of company-financed R&D capital.9 For a given level of output, the effect of a change in R&D tax 7The parameter can be considered as the rate with which R&D expenditures are allowed to be deducted in the current period. To see the significance of immediate expensing of R&D expenditures, compare this with the case in which the government allows only that the economic depreciation of R&D expenditures be deducted from current income. The present value of the depreciation deduc- tions of $1 of R&D with a depreciation and discount rate of 10 percent is equal to 0.50 [= 0.10/(0.10 + 0.10)], and the parameter ~ takes the value 0.50. The after-tax cost of $1 of R&D expenditures for the period 1981 to 1988 is about $0.55, where the contributions of immediate expensing and the incremental R&E tax credit are about 0.42 and 0.038, respectively. For 1981, v = [1-0.5/(1+ r) -~3_2O.33/(1+ r)~] since for 1982 the base was the average of R&D expenditures of 1980 and 1981 (see Eisner et al., 1984). 9Similar rental prices are constructed in the model for the physical capital by taking account of various taxes and subsidies that pertain to plant and equipment investment.
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 57 incentives (T) on the demand for R&D capital stock and on the other inputs in industry is given by Hit = ~lNxh /3 lnT = £~hR(lnpR /BlnT), T = 5,Z, j = L,K,R,M, (2) where £~hR is the price elasticity of input demands with respect to the rental price of R&D capital and (3lnpR/3lnT) is the elasticity of the rental price of R&D capital with respect to a change in tax incentives, which is equal to either ~ in PR I ~ in 5 = -v5 /~1 - Tic - V5) for a change in incremental R&E credit or ~ in PR I ~ in ~ = -arc /~1 - Tic - V5) for a change in the extent of immediate expensing. Among the empirical results from the model estimation are the following: (3) (4) 1. The pattern of the own-price elasticities of labor, physical capital, and intermediate inputs varies from one industry to another, whereas the own- price elasticity of company-financed R&D capital does not vary much from industry to industry. The own-price elasticity of private R&D capital ranges from -1 in textile and apparel (40), lumber, wood products and furniture (41), and other manufacturing (42) to -0.94 in scientific instru- ments (38~. The company-financed R&D price elasticity estimated in this study is in the middle range of own-price elasticities of R&D reported in the literature. Hines (1993) has estimated a price elasticity of company- financed R&D of about -1.2; Hall (1992), about -1; whereas Nadiri and Prucha (1989) and Bernstein and Nadiri (1989) have reported a price elas- ticity of total R&D (company-plus publicly financed) of about -0.4 to -o.5.io 2. The cross-price elasticities suggest that price changes in other inputs such as labor, physical capital, and materials have significant effect on R&D investment. Company-financed R&D capital and physical capital are sub- stitutes in most industries. It also seems that a change in the price of Hour estimates are closer to those of Hall and Hines. The difference between our estimates of own- price elasticity of company-financed R&D and the estimates of Bernstein and Nadiri (1989) and Nadiri and Prucha (1989) can be explained by the fact that the elasticities estimated by these authors pertain to total R&D performed in industry (i.e., company-financed as well as publicly financed) and thus respond less to price changes. However, it very important to note that considerable differences in price elasticity of R&D investment could still arise due to the differences in the model specification and estimation methods.
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58 BORDERLINE CASE company-financed R&D affects physical capital relatively less than a change in the price of physical capital affects company-financed R&D capital. This has the very important implication for public policy that tax measures to promote investment in structures and equipment will have significant indirect effects on R&D investment. 3. Although company-financed R&D is a substitute for labor, it is a comple- ment of intermediate inputs in low it&D-intensive industries but a weak substitute in high-technology industries such as chemicals (28), machin- ery (35), electrical equipment (36), transportation equipment (37), and scientific instruments (381. In short, demand for R&D capital is affected not only by changes in its own rental prices but also by the price movements of other factors of production such as labor, physical capital, and materials. Considerable evidence from this and many other studies shows that factors of production, particularly investment in physical and R&D capital, respond to changes in after-tax prices. Our results suggest that increases in the prices of labor and physical capital lead to an in- crease in private R&D investment. This implies that any input price changes in- duced by government tax policies, whether payroll taxes, corporate taxes, or tax credits and incentives for investment in plant and equipment, will have a signifi- cant indirect effect on R&D investment. Considering R&D tax and subsidy poli- cies in isolation from other taxes and incentives that a firm or industry faces may lead to incorrect measurement of the effects of government policies to promote R&D expenditures. Therefore, it is essential that all taxes that are levied on a firm or industry be considered together to evaluate properly the effectiveness of any R&D tax policies. We estimated the elasticities of cost, labor, physical capital, R&D capital, and intermediate inputs with respect to incremental R&E tax credit and the rate of R&D expensing. These elasticities have been constructed by multiplying the in- put price elasticities by the percentage change of rental R&D price due to a change in R&D tax incentives. The evidence suggests that a change in the rate of ex- pensing has a much greater effect by far, almost 10 times, than a change in incre- mental R&E tax credit. This occurs because the immediate expensing of R&D expenditures constitutes 90 to 96 percent of the reduction of the cost of R&D expenditures whereas the incremental R&E tax credit is responsible for only a small fraction of the price reduction. The effect of the incremental R&E tax credit is nevertheless significant. Both effects are relatively larger in the low R&D iiCordes (1984), for instance, has argued that the ARCS, introduced in 1981 for plant and equip- ment investment, has moved the price of physical capital relative to R&D capital in favor of the former. Thus, the introduction of an incremental R&E tax credit was necessary to restore in some measure incentives for R&D investment. i2The elasticity of cost with respect of tax incentives is given by t7cT=3lnCh/3lnT SR(31nPR /31nT). =
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 59 intensive industries than in high-technology industries, reflecting the fact that industries with a long tradition of R&D investment respond less to the cost changes of R&D investment. This is consistent with the evidence from the tax forms of 1981, 1982 and 1983 (see Cordes (1988, 1989) showing that after the introduc- tion of R&E tax credit, the high-technology manufacturing industries reported smaller increases in R&D expenditures than other manufacturing industries. Based on the model estimates, the incremental R&E tax credit generated, on average, about $2.5 billion dollars of additional R&D expenditures per year in the manufacturing sector during 1981-1988. If it is adjusted with the eligibility ratio of about 0.63 (see Eisner et al., 1984), the R&E credit has stimulated about $1.6 billion dollars of additional R&D expenditures per year.~3 This estimate is con- sistent with those reported by Baily and Lawrence (1992), Hall (1992), and Hines (1993), although it may be biased upward because there is evidence that many firms redefined activities as R&D after the introduction of the R&E credit. Suppose that the government, instead of allowing the immediate deductibil- ity of R&D investment, allows only the economic depreciation of R&D expendi- tures to be deducted from current income. With a discount rate and depreciation rate of 10 percent (see footnote 6), this implies that the value of the parameter his 0.5 and will account for, on average, about 35 percent decline in R&D expendi- tures, or about $16 billion per year for the manufacturing sector as a whole. Dis- allowing immediate deductibility of R&D expenditures would have much greater negative impact on R&D expenditures than abolishing the R&E tax credit. Pro- duction costs would rise by $14.3 billion as a result of the removal of 100 percent deductibility and by $2.6 billion as a result of abolishing tax credit. Industry- financed R&D would be reduced by similar magnitudes, $13.7 billion and $2.5 billion, respectively, with greatest impact falling on it&D-intensive industries (28,35, 36, 37, and 38~. The combined contribution of the tax credit and imme- diate deductibility of R&D expenditures is about $18 billion per year of addi- tional R&D expenditures. This amounts to approximately 40 percent of the total privately financed R&D of the entire manufacturing sector. Moreover, if one takes into account the fact that government directly finances about 30 percent of total R&D performed in the manufacturing sector, the role of the federal govern- ment in support of R&D is quite clear. EFFECTIVENESS OF R&D TAX POLICY One way to evaluate the effectiveness of R&D tax policies is to measure the additional private R&D expenditures generated by the tax policies relative to forgone tax revenues. There is some disagreement among economists about the i3Cordes (1989) has estimated that the credit stimulated about $560 million to $1.5 billion, whereas Hall (1992) has estimated that the additional spending stimulated is about $2 billion 1982 dollars per year.
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60 BORDERLINE CASE effectiveness of R&E tax credit. For instance, Mansfield (1984, 1986) has esti- mated that the additional R&D expenditure per dollar cost to the government ranges between 0.3 and 0.4. Baily and Lawrence (1992) have estimated it to be about 1 to 1.3. About the same estimates as gaily's are provided by Hines (1993), whereas Hall (1992) estimates that the ratio is about 2. These differences in esti- mates are basically due to the differences in price elasticities of R&D estimated by the authors. Our estimate suggests, on average, a benefit-cost ratio of R&E tax credit of about 0.95 for the period 1981 to 1988 for industries included in the sample. If this ratio is compared with the findings reported by other studies, our estimate is in the middle range. From our analysis, we can conclude that the R&E tax credit has not been a failure as the early literature on the subject had suggested, but rather that it has had a modest impact in stimulating private R&D investment. Moreover, if one takes into account the induced output effect from increases in industry R&D expenditures, as well as the spillovers from such investments, then the benefit-cost ratio of the incremental R&E credit will be higher.~4 Table 3.2 reports the results of the following experiment. Assume that for the year 1988 the government abolishes the incremental R&E tax credit and al- lows only the economic depreciation of R&D expenditures to be deducted from the current income. With these assumptions, our estimates imply that the addi- tional cost for the industry of the revenues saved by the government would be about $16.9 billion, but the reduction of R&D tax incentives in turn increases the rental price of company-financed R&D, leading to a reduction of $16.2 billion in private R&D investment. The cost increases and reductions in R&D investment are not uniform across industries. In fact, in it&D-intensive industries, costs will rise as a consequence of the change in public R&D policy. However, the cost increases and reduction in R&D investment in response to the hypothesized changes in R&D tax policies are very large in it&D-intensive industries such as chemicals (28), machinery (35), electrical equipment (36), and transportation equipment (37~. Low-technol- ogy industries, such as food and kindred products (20) and other manufacturers (42), would not be affected as much. This, of course, is not surprising because in the low-technology industries, R&D cost shares are very small; thus, removal of the subsidies has a relatively smaller effect on their cost. The results reported in the two previous sections are based on the pre-1988 structure of the R&E credit. However, a recent extension of the analysis to the post-1988 period suggests that these observations also hold for the year 1992. The magnitudes of the effects vary over time and across industries, but the gen- eral policy conclusions remain the same. i4For the empirical literature that supports this hypothesis, see Nadiri (1993).
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 61 TABLE 3.2 Effect of R&D Tax Incentives on Production Cost and Demand for Private R&D in Manufacturing Industries in 1988 (in billions of current dollars) Zero R&E Tax Credit 10% R&D Depreciation Effect of Removing R&D (from 20%) (A) Rate (from 100%) (B) Tax Incentives (A) + (B) Industry Code Cost R&D Capital Cost R&D Capital Cost R&D Capital 20 0.05 -0.05 0.26 -0.26 0.31 -0.30 26 0.03 -0.03 0.19 -0.18 0.22 -0.22 28 0.42 -0.40 2.32 -2.22 2.74 -2.62 29 0.11 -0.11 0.60 -0.59 0.71 -0.70 30 0.04 -0.04 0.22 -0.21 0.26 -0.25 32 0.04 -0.04 0.21 -0.21 0.25 -0.25 33 0.05 -0.04 0.25 -0.24 0.29 -0.29 34 0.04 -0.04 0.22 -0.22 0.26 -0.26 35 0.47 -0.45 2.59 -2.49 3.06 -2.94 36 0.47 -0.45 2.62 -2.47 3.10 -2.92 37 0.61 -0.59 3.38 -3.25 4.00 -3.83 38 0.21 -0.20 1.16 -1.09 1.37 -1.28 40 0.03 -0.03 0.18 -0.18 0.21 -0.21 41 0.01 -0.01 0.06 -0.06 0.07 -0.07 42 0.01 -0.01 0.05 -0.05 0.06 -0.06 Total 2.6 -2.5 14.3 -13.7 16.9 -16.2 R&E CREDIT: POSSIBLE IMPROVEMENTS The extensive literature evaluating the effectiveness of R&E creditl5 is be- yond the scope of this chapter to survey. I can outline, however, a few criticisms and the benefits of potential improvements in the effectiveness of this fiscal in- strument. The current R&E credit is not targeted sufficiently to be very effective. For example, different types of R&D with different types of productivity and social rates of return may require a more flexible approach. In addition, the tax credits it is often claimed, accrue mainly to large firms in a few industries. Some of these, for example, defense contractors, are also major recipients of public R&D expen- ditures. A more flexible and targeted tax would be less vulnerable to these criti- cisms. For example, the credit could be focused to promote basic research and encourage university-industry cooperation in fields of research and development. The mechanics of qualifying an R&D project, establishing the base year, and i5See Hall (1992, 1995) for an extensive review of the history, methodological issues, and regula- tions pertaining to the R&E tax credit in the United States and other Organization for Economic Cooperation and Development (OECD) countries. Also see Office of Technology Assessment (1996) and OECD (1996).
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62 BORDERLINE CASE classifying R&D expenses are not trivial challenges. An effort to simplify and tighten the existing rules is a worthwhile undertaking. The on-again, off-again history of the R&E credit has contributed to great uncertainty on the part of firms and may have undermined the stimulus to R&D investment. Because of these and other problems associated with the law, admin- istrative costs entailed with the R&E credit are highly The benefits of R&E credit would be significantly greater if it were permanent. There is a need for R&D tax policies to promote not only new investment in knowledge creation but also dissemination of existing knowledge and findings among enterprises and industries. Small businesses, public-sector organizations, and traditionally low it&D-intensive sectors would benefit from a well-targeted technology diffusion policy. There are two fundamental problems, one theoretical and the other practical, in evaluating the results of the econometric evidence and other methods to ascer- tain the effectiveness of the R&E tax credit: 1. The theoretical issue arises from the fact that firms may undertake R&D investment in part for strategic and competitive reasons. To that extent, they are likely to invest in R&D regardless of R&D tax treatment, al- though they will certainly have a financial interest in claiming the tax credit. 2. The measurement problem is related to the unsatisfactory state of the R&D price deflator used in various studies. There has been some effort to im- prove the quality of these deflators at both the aggregate and the firm levels, but the results are not satisfactory. CONCLUSION We have examined the effects of R&D tax policy on the cost structure of the manufacturing industries. It is important to recognize that it&D-specific tax mea- sures are just part of a much larger set of taxes and governmental, fiscal policies that firms face at a given period. Firms rearrange their demand for various inputs to minimize their costs, taking into account the entire set of taxes that they may face. Firms' demands for inputs, particularly investments in physical and R&D capital, respond to changes in their own rental prices as well as to the price changes of other inputs. The cross-price effects can be large and significant. For example, in our study, an increase in the rental price of physical capital or the price of labor induces firms to invest more in R&D. The existing R&E tax credit has been at best a modest success. The evidence on its cost-effectiveness is not as weak as to warrant abolishing it all together.~7 i6See Hall (1995) for further discussion. i7See Mansfield (1986).
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R&D TAX INCENTIVES AND MANUFACTURING-SECTOR R&D EXPENDITURES 63 The immediate deductibility of R&D expenditures is by far the more important subsidy. If the government switched treating R&D expenditures like tangible investments, there would be a substantial reduction of privately financed R&D investment. As shown elsewhere, it seems that publicly financed R&D invest- ment is a more appropriate tool for increasing efficiency and possibly for stimu- lating output growth, whereas R&D tax policy is a more appropriate tool for stimulating pnvate-sector R&D investment. Using data for 1957-1992, our re- cent analysis suggests that the results reported here also hold for the years imme- diately following 1988. Both instruments, subsidies and direct financing of publicly financed R&D expenditures, are important means of sustaining balanced output and productivity growth in the manufacturing sector, but current R&D tax policy should be reex- am~ned to increase its effectiveness in promoting private investment in techno- logical innovation diffusion. ACKNOWLEDGMENT The support from C.V. Starr Center for Applied Economics of New York University is gratefully acknowledged. I would also like to thank SeongJun Kim and Frances Hui for their help. REFERENCES Arrow, K.J. 1962. "Economic welfare and the allocations of resources for invention." In The Rate and Direction of Inventive Activity: Economic and Social Factors, R. Nelson, ed. National Bureau of Economic Research. Princeton: Princeton University Press. Baily,M.N.,andR.Z.Lawrence. 1992. TaxIncentivesfor it&D: What Do the Data TellUs? Study commissioned by the Council on Research and Technology, Washington, D.C. Bernstein, J. 1986. Research and Development, Tax Incentives and the Structure of Production and Financing. Toronto: University of Toronto Press. Bernstein, J., and M.I. Nadiri. 1989. "Rates of return on physical and R&D capital and structure of production process: Cross section and time series evidence. " In Advances in Econometrics and Modeling, B. Raj, ed. Dordrecht: the Netherlands: Kluwer. Carmichael, J. 1981. "The effects of mission-oriented public R&D spending on private industry." Journal of Finance 36:617-627. Cohen, W.M., and R.C. Levin. 1989. "Empirical studies of innovation and market structure." In Handbook of Inudstrial Organization, Vol. II, R. Scmalenses and R.D. Willing, eds., New York: North Holland. Cordes, J.J. 1984. "R&D tax incentives." In The R&E Tax Credit: Issues in Tax Policy and Industrial Innovations, K. Brown, ed. Washington, D.C.: American Enterprise Institute for Public Policy. Cordes, J.J. 1988. "The impact of tax policy on the creation of new technical knowledge: An assessment of the evidence." In The Effect of Technological Change on Employment and Eco- nomic Growth, R. Cyert and D. Mawrey, eds. Cambridge, Mass.: Ballinger. i8See Mamuneas and Nadiri (1996).
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