134 The Impact of the Act for the Development of Biotech and New Pharmaceuticals Industry on Firm Innovation in Taiwan (USPTO), since we only focus on U.S. patents applied by Taiwanese firms.8 Our empirical results show that innovation activities are encouraged by the Biopharmaceutical Act. First, unlike unapproved firms, approved biopharmaceutical firms significantly increase their R&D investments after the Biopharmaceutical Act. However, these firms have not significantly improved innovation quality yet. In addition, the encouragement effect in the intra-industry analysis only occurs for pharmaceutical and low R&D intensity firms. Second, the approved biopharmaceutical firms exhibit significantly more innovation activities and higher innovation quality than high-tech firms after the Biopharmaceutical Act. This result of the inter-industry comparison over innovation investment primarily exists in low R&D intensity firms and small firms while the result of inter-industry comparison over innovation quality only exists among large firms. Therefore, our findings support the policy effect of the Biopharmaceutical Act on innovation. Our paper contributes to the literature regarding the effect of the Biopharmaceutical Act on innovation in several ways. First, we conduct DID approach to avoid the endogeneity problem, which previous studies did not particularly address (Chen, 2013; Hsu, 2018; Kao, 2012). This makes our results more reliable and also reduces the influences of other exogenous shocks and other potential factors. Second, we find that the approved biopharmaceutical firms (beneficiaries of the Act) have greater investments in innovation than unapproved biopharmaceutical firms and high-tech firms (non-beneficiaries of the Act) have after the Biopharmaceutical Act. Our results confirm with previous studies that tax credit policy can encourage innovation activity. In addition, our finding from the inter-analysis supports the argument of Yang et al. (2012) that government should establish tax credits across industries. This finding also confirms the policy effectiveness of the Biopharmaceutical Act, which grants tax credits only for biopharmaceutical firms. Third, we examine what types of firms derive greater benefits from the tax credit provisions of the Biopharmaceutical Act. We find that pharmaceutical firms and low R&D intensity biopharmaceutical firms exhibit greater innovation investments than unapproved biopharmaceutical firms after the Biopharmaceutical Act. We also find that small and low R&D intensity approved biopharmaceutical firms have higher innovation investments than 8 There are fewer citations received by the patents that are applied with and granted by the Taiwan Intellectual Property Office (TIPO). Thus, using TIPO patents could be more difficult to gauge patent citations. In addition, USPTO patents are usually regarded as more valuable (Huang and Chang, 2020).
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