Empirical study on effectiveness of research and experiment tax credit

Summary form only given. Firms' R&D activities are the major source of productivity improvement, especially for countries like Japan whose labor is relatively scarce because of aging population and whose capital growth rate is saturated. Technologies derived from private R&D activities have positive economic externality since the public return of R&D investment exceeds private return. Therefore, from the government's standpoint, its efforts to promote private R&D activities through various means including tax concession can be justified as economically sound measures to maximize public welfare. Using empirical data of companies that cover more than 80% of the private R&D expenditure in Japan, this paper demonstrates the effectiveness of the R&D tax credit and makes some policy recommendations. The questionnaire result shows that the majority of the firms no longer use the incremental R&D tax credits because they lost qualifications in the 1990s when their R&D expenditure hit an all-time high. In other words, this suggests corporate R&D expenditure is set to plunge after entering the 1990s. This coincides with the fact that the amount of incremental R&D tax credits has been on the constant decline since FY1993. Other answers confirm that this tax credit system has a spillover effect.