139 NTU Management Review Vol. 31 No. 2 Aug. 2021 The empirical studies find that tax credits have a positive effect on R&D investment, though the results of estimators vary depending on the sample data, model specification, and methodology. Without the tax credits for R&D, the expense labelled or not labelled as the R&D investment is indifferent for a firm. However, when the government provides preferential tax treatment for R&D investments, firms generally prefer to label expenses as R&D investments. Considering the relabeling problem of R&D, which may cause overestimation of the effect of R&D, Hall and Van Reenen (2000), using the data of OECD countries, still find that each dollar of tax credits for R&D increases R&D investments by a dollar. In addition, assessing the effect of R&D tax credits suffers from the selection bias problem because the recipients of tax credits may have characteristics different from those of non-recipients. Czarnitzki et al. (2011) adopt the non-parametric matching method to remove the selection bias problem and support the effectiveness of tax credits on innovation output for Canadian firms. Yang et al. (2012) investigate the tax credit policy of Taiwan and use the PSM approach to eliminate selection bias problems. By adopting detailed information about the amount of R&D tax deduction as the instrumental variable and a generalized method of moment methodology to control for endogeneity and firm heteroskedasticity, Yang et al. (2012) also find that tax credits stimulate additional R&D investments. 2.4 Direct Subsidies versus Tax Credits In terms of the effects on the private R&D decisions, direct subsidies are different from tax credits. In practice, target firms or projects may not be randomly granted subsidies. Winston (2006) proposes that political pressure, corruption, and bureaucratic objectives may result in government’s failure to select proper firms or projects. In addition, direct subsidies may cause moral hazard problems because the recipients of subsidies may not devote their efforts to R&D activities after obtaining funds from the government. By contrast, tax credits do not engender moral hazard problems because firms must increase R&D investments to obtain the credits. Further, firms would recalculate benefits and costs to decide their investments in R&D while tax credits reduce the cost of R&D. The credit granted depends on the market-oriented R&D decision of firms rather than the government’s discretionary decision. Accordingly, the problems of government failure and moral hazard from the direct subsidies imply that tax credits are more effective in encouraging R&D. The time patterns of the stimulus effects of tax credits and direct subsidies are also
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