The US Research & Experimentation tax credit: The case for an effective R&D investment policy incentive
Thomas A Hemphill
Department of Strategic Management and Public Policy, School of Business, George Washington University, Alexandria VA, United States of America
PP: 341 - 356
Abstract
Since 1981 (excluding one year of unavailability), the US Research & Experimentation (R&E) tax credit has been available as an incentive to corporate managers interested in increasing their annual investment in applied research.
Research indicates that the R&E tax credit has an overall negligible effect on increasing annual industry applied research investment in the US (as a percentage of overall industry-funded R&D expenditures, it has ranged from a low of 1.3% (for 1995) to a high of 3.9% (for 2000)).
The author reviews the economic literature on the R&E tax credit program's effectiveness and contrasts it with the management literature on firm-level, R&D strategic investment decision-making. A key recommendation is that a survey be conducted to assess the importance of this policy incentive to executive management decision-makers when they consider company R&D investment. The survey results will assist in the policy design of an effective R&E tax credit program.
Keywords
applied research, investment decision-making, national competitiveness, research & experimentation tax credit, sustainable competitive strategy, technology strategy
Article Text
The role of industrial research and development (R&D) is generally recognized as a primary catalyst fueling national economic growth and competitiveness in the knowledge economy (Porter 1990; Smith & Barfield 1996). Likewise, it is acknowledged that organized R&D is an integral component of sustained competitive advantage in technology-based firm strategy (Porter 1985). The traditional model of corporate R&D as a non-revenue generating, cost center is now giving way to the R&D function being fully integrated into the customer-centric, revenue-generating perspective of corporate and business strategy (IBM 2006).
Moreover, the firm model of closed innovation, where all primary R&D activities are contained within the organizational boundaries of the firm, has expanded to include an open innovation approach, whereby intellectual property is shared and R&D risk is managed through innovative, multi-firm collaborative arrangements (Chesbrough & Rosenbloom 2002; Chesbrough 2003; Chesbrough 2006). In the United States (US) the long-term trend of applied R&D activities since 1981 are largely funded by US corporations - as compared to government sources (National Science Board 2004).
In 2005, US companies expended $226.2 billion in current-year dollars on R&D, and business sector investment is projected to increase to $242 billion in 2006 (The National Science Board 2008). Furthermore, in 2006, the business sector funded 66 percent of US R&D, while the US government supplied the second largest share of R&D funding (28 percent) and other sectors of the economy, including state governments, universities and colleges, and non-profit institutions, contributed the remaining 6 percent of funding (The National Science Boar, 2008). In 2006, the US performed an estimated $62 billion of basic research, $75 billion of applied research, and $204 billion on development activities (The National Science Board 2008).
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