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R&D Tax Credits Increase Resiliency of R&D-Intensive Firms

January 29, 2015

As the federal and state governments look for methods to support the creation and retention of well-paying science and tech (S&T) and manufacturing jobs, two recent reports have found that R&D tax credits play a vital role in helping keep domestic R&D-intensive firms resilient from economic downtowns and competition from emerging economics. These studies confirm the importance of R&D-intensive firms, which have taken advantage of R&D tax credits, are more likely to report a higher percentage of corporate liquidity; are less likely to cut capital expenditures and employment; and, downsize considerably less than the average firm.

In a recent study from HEC Paris, Johan Hombert and Adrien Matray found that R&D-intensive firms were more resilient to import competition from China and other emerging economies – especially if they received tax credits for performing R&D. In Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?, the authors examined the importance of R&D tax credits on the resiliency of R&R-intensive firms including S&T and manufacturing firms. The authors found that while the average firm cuts capital expenditures and employment when import competition increases. However, R&D-intensive firms are more likely to continue to invest in capital and labor while in the face of international competition. The authors contend that generous R&D tax credit policies is one of the primary determinants that help these firms be more resilient. Read the study…

A study by the Federal Reserve Board also found that R&D-intensive firms were more resilient to economic downtowns, especially those that receive R&D tax credits. In Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&D Tax Credits, the authors Antonio Falato and Jae Sim contend that innovation is a primary determinant of corporate liquidity including in times of economic recession. The authors found that increases in state R&D tax credits lead to increases in the ratios of cash to bank lines of credit and to book equity and to decreases in bank debt, secured debt, and overall net indebtness. Inversely, cuts to state R&D tax credits decreased the overall net indebtness of innovative firms and reduced corporate liquidity. The increased percentage of liquidity allows R&D-intensive firms to maintain R&D spending, employment, and capital expenditures during economic downtowns. Read the study…

r&d, r&d tax credits, recent research, manufacturing