132 The Impact of the Act for the Development of Biotech and New Pharmaceuticals Industry on Firm Innovation in Taiwan previous studies argue that the government may not grant subsidies to proper projects or firms with high social return (e.g., Wallsten, 2000; Winston, 2006) because of government failure resulting from political pressure, corruption, and bureaucratic objectives. By contrast, tax credits decrease the marginal cost of R&D. Thus, the incentive function of tax credits is determined by the benefit and cost analysis of R&D rather than government failure. Second, the recipients of subsidies may not devote efforts to R&D after receiving the funds from government. Tax credits generally do not have this moral hazard problem because the firms must increase R&D investment to obtain the credits. Accordingly, the tax credits used in Biopharmaceutical Act should be more effective for R&D than direct subsidies. In addition to tax credits, the Biopharmaceutical Act also adopts non-tax credit tools. First, the Biopharmaceutical Act grants managers and employees the firms’ shares and share warrants to increase managers’ motivation to invest in R&D. Second, the Act relaxes certain restrictions on employees to increase collaboration between industries and academic institutions, which allows the biopharmaceutical firms to obtain the knowledge of R&D incoming spillover from other institutions. Therefore, these non-tax credit tools could also alleviate the R&D underinvestment problems. Although previous studies have investigated the effects of Biopharmaceutical Act on innovation (Chen, 2013; Hsu, 2018; Kao, 2012), they do not have consistent results. By comparing the data before and after 2007, Chen (2013) finds significant decreases in R&D expenditure after the Biopharmaceutical Act. Kao (2012) adopts the direct subsidy of R&D from the government, the amount of tax credit from the Biopharmaceutical Act, and the amount of government direct investment as policy proxies for the influence of the Biopharmaceutical Act, and finds no significant impact of these policies on biotechnology patents. Moreover, Chen (2013) and Kao (2012) both examine the change in innovation for the biopharmaceutical industry before and after the Biopharmaceutical Act, but they may suffer from endogeneity issues. Specifically, the difference between the pre- and postBiopharmaceutical Act outcome may result from other exogenous influences such as the global financial crisis of 2007-2008. Hsu (2018) shows that the R&D expenditures of biopharmaceutical industry significantly increase after the Biopharmaceutical Act. Hsu (2018) also finds that firms which are approved under Biopharmaceutical Act (approved biopharmaceutical firms) tend to have higher R&D expenditures than those not approved (unapproved biopharmaceutical firms). Hsu’s (2018) findings thus support the positive influence of Biopharmaceutical Act on innovation. However, Hsu (2018) may also suffer
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