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R&D tax incentives have gained popularity among the OECD countries as a means to improve innovation. However, the impact of R&D tax incentives on innovation has not been commensurate with the tax incentives given. This study aims to analyze the role of R&D tax incentives on firm innovation. Data on innovation and government support in 28 OECD countries was drawn from the OECD database. Ordinary Least Square (OLS) regression analysis is employed in estimating the relationship between R&D tax incentives and firm innovation. The study found that R&D tax incentive is displaced by other R&D support schemes by the government. The study concludes that, even though R&D tax incentives are a good predictor of firm innovation, R&D tax incentives are crowded out by other forms of funding for R&D. In the presence of other government support schemes for R&D, firms divert R&D tax incentives cost savings away from R&D investments.
Sein et al. (Sun,) studied this question.