130 The Impact of the Act for the Development of Biotech and New Pharmaceuticals Industry on Firm Innovation in Taiwan 1. Introduction Government policies are commonly used to encourage firms to increase their investments in Research and Development (R&D). In general, R&D investments and innovation activities are key sources of growth and sustained operations of a firm and/or a nation (Romer, 1990; Aghion and Howitt, 1992). However, the nature of R&D activities, which includes high uncertainty, long-run cumulative effect, imperfect appropriability, and high information asymmetry between investors and managers, causes R&D investment to fall below the socially optimal level (Aghion, Van Reenen, and Zingales, 2013; Arrow, 1962; Brown, Martinsson, and Petersen, 2012; Bushee, 1998; Jones and Williams, 1998; Porter, 1992). To solve the R&D underinvestment problems, many countries adopt public policies such as tax credits and direct subsidies to stimulate R&D because these policies can ameliorate funding issues and indirectly eliminate the financing difficulty problem of R&D (Aerts and Schmidt, 2008; Czarnitzki and Hussinger, 2004; Cerulli and Potì, 2012; Czarnitzki, Hanel, and Rosa, 2011; Yang, Huang, and Hou, 2012; Hall and Van Reenen, 2000). In Taiwan, the problem of R&D underinvestment in the biotech and new pharmaceuticals industry (biopharmaceutical industry) is particularly severe. The biopharmaceutical industry and high-tech industry are respectively the first and second highest R&D intensity industries in Taiwan for the period 2007-2017.1 Brown, Martinsson, and Petersen (2017) argue that the industries with more R&D intensity are more likely to experience innovation underinvestment. In 1982, the Science and Technology Development Plan of Taiwan listed these two industries as important development items for the nation. After decades of struggles, Taiwan’s economy is mainly supported by the high-tech industries, including electronic components, information services, semiconductors, and optoelectronics technology. However, the growth of the biopharmaceutical industry is relatively limited and 1 The biopharmaceutical industry includes pharmaceutical, biomedical material, and health care firms. The high-tech industry consists of computers and peripherals, semiconductors, consumer electronics retailing, optoelectronics, telecommunication and networking, electronic components, information technology services, and other electronics. Our untabluated results show that R&D intensities, the ratio of R&D expenditure to total assets, for the Biopharmaceutical and high-tech industries are 4.08% and 3.04%, respectively.
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