1. Introduction
The majority of countries around the world are aware that investment in research and development (R&D) plays a vital role in sustainable economic growth [
1,
2,
3,
4,
5]. In order to make significant progress in this area, in the so-called Lisbon Strategy the European Union (EU) set an objective to raise R&D spending to 3% of GDP by 2010, where the proportion financed by the business sector should be 2/3 of that total [
6]. However, this objective was not achieved. Therefore, this objective was resumed in the European strategy for smart, sustainable and inclusive growth called Europe 2020, which set it as the main objective [
7]. The aforementioned suggests that EU sees the potential in private R&D expenditures. This holds also for Organisation for Economic Co-operation and Development (OECD) countries, since the largest share of R&D expenditures is made by business sector and it accounts more than 60% of expenditure on R&D in the OECD area [
8].
Due to the importance of private R&D investment, governments use different tools of public support in order to encourage companies to invest their additional private funds in R&D activities. Although the government sector plays a relatively minor role as a performer of R&D it is a major funder of R&D performed in the business sector [
8]. For this purpose, governments commonly use direct funding through R&D subsidies and indirect funding through R&D tax incentives. Companies from different countries recognize that the principal drivers that are motivating them to invest more in R&D include the availability of more types of benefits, enabling them to use a combination of subsidies, tax incentives and so forth [
9]. Nevertheless, a comparison between R&D subsidies and R&D tax incentives reveals that the latter are currently on the rise, while R&D subsidies are decreasing [
10]. This is mainly because most support schemes expired and new ones have not yet been announced, which is associated with current presence of public financial pressures [
11]. This paper focuses only on indirect part of the government funding through R&D tax incentives and aims at understanding the simultaneous influence of private R&D investment and R&D tax incentives on sustainable corporate growth.
In the existing literature, there are many studies addressing the debate whether R&D investment can improve competitive position of companies and enhance their sustainable growth. However, studies addressing the efficiency of R&D tax incentives on a corporate level are relatively scarce, mainly due to data limitations. Therefore, this paper tries to add new evidence and consequently to expand previous research by utilising a unique database, which includes all relevant data regarding main resources of production, R&D tax incentives and corporate performance as well. In terms of the expected results, the research will contribute to both academic and practical knowledge and it is likely to be useful for different stakeholders ranging from policymakers to managers or investors. Currently, the whole world economy strives to become knowledge-based calling for intensive R&D investment. Since some issues regarding R&D investment remain unsettled, this paper may help to illuminate certain ambiguities relating to this investment, which is expected to be one of the crucial investments in the future.
This paper tries to consider two issues. First, it tries to evaluate the impact of private R&D expenditures on sustainable corporate growth. The second part extends the first part by considering private R&D expenditures and R&D tax incentives simultaneously. Moreover, both of these parts try to determine whether there are any differences between high-tech and low-tech companies regarding private R&D expenditures, R&D tax incentives and sustainable corporate growth. The remaining sections of this paper are organized as follows. In the next section, a literature review and hypotheses development is presented. The following section describes research design covering data description, variables as well as research methodology and model selection. In the fourth section, empirical results are described. The paper ends with discussion and conclusions in which the main findings, policy implications and future research avenues are considered.
2. Literature Review and Hypotheses Development
The global economy is currently facing new challenges related to the emergence of new technologies. Hence, ever-greater emphasis is being placed on R&D at the country and firm level. Traditionally, companies have been focusing their business operations mainly on physical assets. However, this has dramatically changed over the past years. Namely, in the period of industrialization, tangible assets represented the main source of value creation but in the knowledge economy era, R&D investment has higher potential for value creation compared to tangible assets [
12]. Since R&D investment represents essential determinant for the economic growth, from a society’s point of view potential underinvestment is considered as explanation for government intervention to stimulate these kind of investment [
13]. Therefore, many governments create and implement different kind of public policies that promote R&D investment in the business sector and consequently encourage companies to develop new knowledge, skills and innovation in order to facilitate stronger competitiveness, job creation and spur economic development.
Governments use different tools of public support to encourage companies to invest their additional private funds in R&D activities. In addition to providing direct R&D support through subsidies, many governments also incentivise company’s R&D indirectly, through tax incentives. While R&D subsidies have been available to companies for a longer period, R&D tax incentives have gradually become an important form of public support for boosting companies’ R&D expenditures in many countries [
14]. In this respect,
Figure 1 presents the use of direct and indirect government support for R&D in business sector for selected OECD countries. Namely, data for Israel, Luxembourg, Poland and Sweden is unavailable or insufficient and therefore these countries are not included in the presentation [
15].
Figure 1 reveals that Belgium and France provided the highest total public support for R&D in business sector as a percentage of GDP in 2015 among presented OECD countries. A comparison between 2006 and 2015 shows an increase of public support in 21 OECD countries with the highest increase in Ireland and Belgium. Moreover, it is also evident that Hungary and United States have the largest share of GDP for direct support, while Ireland and Belgium have the largest share of GDP for indirect support. In general R&D tax incentives in 2015 accounted for nearly half of total government support for business R&D in the OECD area, up from one-third in 2006 [
15]. In the literature, there is an ongoing debate on what is more effective for stimulating investments in R&D: R&D subsidies or R&D tax incentives. There is no agreement on this issue since different results suggest different policies and different solutions [
16,
17,
18]. Regarding the use of direct or indirect public support for R&D in business sector, there appears to be broad consensus that direct support through R&D subsidies is more suitable for supporting longer-term, high-risk research and for targeting specific areas that generate public goods or that have particularly high potential for spillovers. In contrast, indirect support through R&D tax incentives is more suited in principle to encourage R&D activities oriented towards the development of applications that have the potential to be brought to the market within a reasonable timeframe [
19]. Considering the dynamic aspect of the development of both tools of public support for R&D investment, it is obvious there is a shift towards indirect public support through R&D tax incentives in OECD countries. This suggests that R&D tax incentives are gaining more importance and have become a major tool for promoting business R&D in OECD countries.
In the literature, it is emphasized that sustainable economic growth depends on the application of new knowledge in order to develop improved products and production processes. Several authors argue that R&D investment is one of the key factors for enhancing technological progress and economic growth at national level [
20,
21,
22]. In this regard, Silaghi et al. [
23] also separate R&D into private and public R&D, whereby the results of their analysis show a significantly significant impact of private R&D on economic growth, while public R&D remains not significant. However, public R&D does not crowd out the positive effect of private R&D. Further, Armeanu et al. [
24] try to identify the main drivers of sustainable economic growth in EU member countries. They establish that R&D expenditures have a positive impact on economic growth as well as on total factor productivity, which can also enhance growth. While the aforementioned macroeconomic analyses reveal the positive impact of R&D investment on economic and sustainable growth, microeconomic analyses show that R&D expenditures have a positive impact on corporate performance, which is proven by studies from different countries around the world [
25,
26,
27,
28,
29,
30,
31]. Investment in R&D can be therefore expected to enhance corporate growth [
32]. Brief literature review reveals beneficial effect of R&D expenditures on national and corporate growth. The aforementioned represents one of the main reason why are companies increasingly motivated to invest in R&D activities. Moreover, the shift from industrial to knowledge-based economy has significantly increased the importance of R&D investment since in such era; it has higher potential for value creation compared to tangible assets, especially in terms of improving competitive position of companies and enhancing their sustainable growth. Based on the above, the first research hypothesis is proposed:
Hypothesis 1. Private R&D expenditures have a positive impact on sustainable corporate growth at the firm level in selected OECD countries.
Although R&D investment can bring certain benefits for the companies, the companies’ motivation for such investment can still be questionable. The reason behind this is that the amount of R&D investment that is socially optimal is in general larger than privately optimal R&D investment [
33]. Private R&D expenditures are therefore broadly thought to be underinvested compared to what is socially optimal. This is mainly due to the imperfect appropriability of new knowledge on the one hand and gaps in financing caused by information asymmetry on the other [
34,
35]. Therefore, governments in many countries provide tools of public support to enhance R&D activity both directly or indirectly. In this respect, Svoboda [
36] investigates the impact of R&D tax incentives by comparing its effectiveness to R&D subsidies at a macro level in selected OECD countries. The results of his study suggest that R&D tax incentives are more effective than R&D subsidies. These results can therefore partially explain why R&D tax incentives have become a central part of economic policies in many countries all around the world. There exist also some empirical studies at a micro level establishing that R&D tax incentives have a positive effect on companies R&D expenditures [
37,
38,
39,
40,
41,
42]. Compared to studies, which examine the effect of R&D tax incentives on the companies’ R&D expenditures, there are only few studies, which examine the direct effect of R&D tax incentives on corporate performance and growth. Czarnitzki et al. [
41] investigate the effect of R&D tax incentives on innovation activities of manufacturing companies in Canada. The results of this study show that R&D tax incentives recipients realize a higher number of product innovations, as well as increased sales shares of new and improved products. Moreover, there is also some evidence in the literature about a positive relationship between the use of R&D tax incentives and the probability of introducing a world first innovation [
43]. The literature review reveals encouraging results of terms of the positive impact on private R&D investment, innovation output, corporate performance and corporate growth. Namely, there is scarce evidence confirming that, besides R&D investment, the generosity of R&D tax incentives also have a positive effect on sustainable corporate growth [
44,
45]. Based on the above, the following second research hypothesis is proposed:
Hypothesis 2. R&D tax incentives (in interaction with private R&D expenditures) have a positive impact on sustainable corporate growth at the firm level in selected OECD countries.
4. Empirical Results
In the first part of the analysis, multiple regression analysis in different econometric specifications (fixed effects, random effects and pooled regression model) is applied to evaluate the impact of private R&D expenditures on sustainable corporate growth. First, the empirical model is tested for all companies. Further, the empirical model is tested for different subgroups of companies separately in order to determine whether there are differences between high-tech and low-tech companies. The empirical results are presented in
Table 7.
The results of fixed effects model presented in
Table 7 reveal that besides the growth in classical production factors (capital and labour) also R&D growth has a positive and significant impact on sustainable corporate growth in the case of all companies included in the analysis. The aforementioned holds also for high-tech companies. However, the results for low-tech companies indicate that only employment growth has a positive impact on sustainable corporate growth. Considering other econometric specifications (random effects and pooled regression model), the results for all production factors are significant also for low-tech companies. Based on the results of fixed effects model representing the baseline model in this paper from which the main conclusions are derived, Hypothesis 1, that private R&D expenditures have a positive impact on sustainable corporate growth at the firm level in selected OECD countries is supported. However, this applies mainly to high-tech companies since R&D growth is not significant when considering only low-tech companies in the analysis.
The second part of the analysis, multiple regression analysis in different econometric specifications (fixed effects, random effects and pooled regression model) is applied to evaluate the impact of R&D tax incentives on sustainable corporate growth by taking into account the interaction with private R&D expenditures. First, the model is tested for all companies. Further, the model is tested for different subgroups of companies separately in order to determine whether there are differences between high-tech and low-tech companies. The empirical results are presented in
Table 8.
The results of fixed effects model presented in
Table 8 show that besides the growth in classical production factors (capital and labour) also R&D tax incentives growth has a positive and significant impact on sustainable corporate growth in the case of all companies included in the analysis. The aforementioned holds also for high-tech companies. The results for low-tech companies indicate that only employment growth and R&D tax incentives growth have a positive and significant impact on sustainable corporate growth. Considering other econometric specifications (random effects and pooled regression model), the results for all production factors are significant also for low-tech companies. Based on the results of fixed effects model representing the baseline model in this paper from which the main conclusions are derived, Hypothesis 2, that R&D tax incentives (in interaction with private R&D expenditures) have a positive impact on sustainable corporate growth at the firm level in selected OECD countries is supported. Moreover, the results suggest that R&D tax incentives (in interaction with private R&D expenditures) improve sustainable corporate growth also in low-tech companies.
The results of the empirical analysis seem to be reasonable. They suggest that private R&D expenditures as well as R&D tax incentives (in interaction with private R&D expenditures) have a positive impact on sustainable corporate growth at the firm level in selected OECD countries. However, by considering different subgroups of companies, the empirical results become more interesting. In the case of high-tech companies, the results reveal the positive and significant impact of private R&D expenditures and R&D tax incentives on sustainable corporate growth. This is not the case in low-tech companies since the results suggest that sustainable corporate growth of these companies is not stimulated by private R&D expenditures. On the other hand, R&D tax incentives (in interaction with private R&D expenditures) represent the determinant of sustainable corporate growth in low-tech companies. Nevertheless, the comparison between different subgroups of companies reveals much higher values of regression coefficients, suggesting that the impact R&D tax incentives (in interaction with private R&D expenditures) is more prominent in high-tech companies.
5. Discussion and Conclusions
The paper provides some insight into the area of private R&D expenditures and the most common tools of public support for R&D in selected OECD countries. As the majority of countries around the world are aware that R&D investments are important for sustainable economic growth, their governments try to encourage companies to invest their additional private funds in R&D activities by using different tools of public support for R&D. The most common of these tools are direct funding through R&D subsidies and indirect funding through R&D tax incentives. In most OECD countries, both of these tools are available. This paper tries to add some value to the existing literature evaluating the impact of private R&D expenditures and R&D tax incentives on sustainable growth in selected OECD countries by utilising a unique database encompassing all relevant data regarding main resources of production, R&D tax incentives and corporate performance.
Using different econometric specifications of multiple regression analysis on a panel dataset of 1372 companies investing the largest amounts in R&D activity in latest consecutive years, all of the proposed hypotheses are supported. The empirical results of this paper show a positive and significant impact of private R&D expenditures as well as R&D tax incentives (in interaction with private R&D expenditures) on sustainable corporate growth at the firm level in OECD countries. The comparison between different subgroups of companies reveals that private R&D expenditures represent one of the main driver of sustainable corporate growth especially in high-tech companies. Further, the empirical results reveal that R&D tax incentives (in interaction with private R&D expenditures) are key determinant of sustainable corporate growth in both subgroups of companies, whereby the impact is more prominent in high-tech companies.
The aforementioned results regarding private R&D expenditures and R&D tax incentives meaningfully complement to the existing literature, which is in general mostly focused on the relationship between private R&D expenditures and corporate performance. Nowadays, R&D investment becomes extremely important also from the aspect of policymakers, which usually play a major role in determining a business environment for companies as well as in designing different policies with the aim of facilitating their business operations. In terms of public support for R&D investment, there is often a debate, who should be an appropriate beneficiary. Although this debate is more prevalent in the case of R&D subsidies, the policymakers should also be aware the effect of R&D tax incentives on different subgroups of companies. The results of this paper can therefore help to clarify certain ambiguities regarding R&D tax incentives. At first glance, it seems that private R&D expenditures enhance sustainable corporate growth only in high-tech companies. However, when considering the simultaneous effect of R&D tax incentives the results reveal that they turn private R&D expenditures to one of the main determinant of sustainable corporate growth also in low-tech companies. This can signalise to policymakers how an appropriate policy measure such as the introduction of R&D tax incentives can facilitate business operations of different subgroups of companies and consequently improve their corporate performance and enhance corporate sustainable growth. As it is evident from current trends, there is a shift towards indirect public support through R&D tax incentives suggesting that more and more governments use R&D tax incentives as a major tool for promoting private expenditures in OECD countries. Nevertheless, there are still some governments doubting whether the implementation of such measure is effective or not and the presented findings may encourage them to implement some encouraging R&D policies.
The paper has also some limitations as due to the lack of firm level evidence regarding the use of R&D tax incentives, only a proxy for R&D tax incentives is used in the analysis. Therefore, it would be interesting to include in the analysis more specific firm-level data regarding R&D tax incentives. Another potential limitation of this paper is that the empirical analysis is due to data constraints restricted to recent two consecutive years, namely 2015 and 2016. It would be interesting to extend the period of the analysis in order to examine the impact of private R&D expenditures and R&D tax incentives on sustainable corporate growth in time. Finally, the empirical analysis is based only on top corporate R&D investors from selected OECD countries, which may affect generalization of the results. Nevertheless, the findings of this paper provide some new evidence to the existing literature addressing R&D investment and related issues. The findings of the paper will be beneficial for academic and practice experts and may increase the awareness of companies on the importance of private R&D expenditures and R&D tax incentives and also can help governments in designing R&D tax incentives policy. Namely, R&D investment is expected to be one of the key determinant driving corporate performance and sustainable corporate growth.