135 NTU Management Review Vol. 31 No. 2 Aug. 2021 high-tech firms after Biopharmaceutical Act. These findings imply that firms with more serious R&D underinvestment problems are more strongly encouraged to invest in R&D by the Biopharmaceutical Act. The remainder of this paper is organized as follows. Section 2 reviews prior literature including studies on the R&D underinvestment problem, theoretical papers on public policies that encourage R&D investment, and important related public policies of other countries. Section 3 describes the data, defines the variables, and introduces the PSM and DID methodology. Section 4 shows the results of the intra-industry and inter-industry analyses, and the subsample analysis. Section 5 summarizes our findings and makes the conclusion. 2. Literature Review The first part of this section discusses the nature of private R&D and the corresponding theoretical concepts that explain the R&D underinvestment problem. To address the R&D underinvestment problem, the government often adopts policies such as tax credits, direct subsidies, construction of national laboratories, and encouraging the cooperation between industry and academia. Among these public polices, the two primary policies used by the government to encourage private R&D are direct subsidies and tax credits. Therefore, we respectively use two subsections to illustrate and compare these two policies. Finally, to understand the effectiveness of the Biopharmaceutical Act in Taiwan, we consider the influence of tax credits and non-tax credits on R&D. 2.1 Theories that Explain the Underinvestment in Private R&D Many papers argue that the nature of private R&D activities leads to underinvestment in R&D. First, the agency theory posits that the conflict of interest between managers and shareholders gives managers less incentive to engage in R&D. Managers usually have less incentive to innovate because the innovation process is long, unpredictable, heterogeneous, complicated, and has a high probability of failure. Porter (1992) and Bushee (1998) argue that myopic managers, who focus on profits to meet short-term goals, may cut R&D expenditures because R&D activities are usually long-term. In addition, Aghion et al. (2013) propose that risk-averse managers have less incentive to do R&D because these managers may be fired merely for having bad luck with risky investments. Further, lazy managers like to have a quiet and happy life and may not want to engage in R&D because
RkJQdWJsaXNoZXIy ODg3MDU=