178 The Impact of the Act for the Development of Biotech and New Pharmaceuticals Industry on Firm Innovation in Taiwan shock of the Biopharmaceutical Act. To demonstrate the benefits and policy effectiveness of the Biopharmaceutical Act, we conduct both intra-industry and inter-industry analyses. The results of the intra-industry analysis show that the Biopharmaceutical Act induces the approved biopharmaceutical firms to increase innovation investments. This finding is consistent with most previous studies which find a positive effect of tax credits on R&D. The stimulation effect of the Biopharmaceutical Act on the innovation investments in the biopharmaceutical industry only exists among pharmaceutical and low R&D intensity firms. The subsample findings may have the similar economic implication since Yang et al. (2012) find that pharmaceutical firms usually have low R&D intensity. Pharmaceutical firms tend to underinvest more in R&D than non-pharmaceutical firms because of the high risk and fewer successful cases in new medicine, the long period required for innovation, and the substantial investment necessary. Low R&D intensity firms are more likely to underinvest in R&D. Therefore, these findings for pharmaceutical and low R&D intensity firms demonstrate the effectiveness of the Biopharmaceutical Act for firms with more serious underinvestment in R&D. In addition, the inter-industry analysis supports the policy effectiveness of the Biopharmaceutical Act. The approved biopharmaceutical firms are motivated more to invest innovation and to improve innovation quality than high-tech firms. By investigating the SUI of Taiwan, Yang et al. (2012) find that the tax credits have more effect on R&D for industries with greater R&D intensity and suggest that the government should establish various tax credits. Therefore, our results support the argument of Yang et al. (2012) and confirm the effectiveness of the Biopharmaceutical Act, which grants the additional benefit of tax credits only for biopharmaceutical firms, while the SUI grants all industries the same preferential tax treatment. Further, the results of the inter-industry analysis are dominated by low R&D intensity firms and small firms. These groups are more likely to suffer severe R&D underinvestment problems. Small firms often find it more difficult to appropriate the private returns of R&D and lack the physical assets to serve as collateral (David et al., 2000; Hall, 2002). These subsample results strengthen our finding that the policy effectiveness of Biopharmaceutical Act is greater for firms with more serious R&D underinvestment problems. This finding is also consistent with the contention of Baghana and Mohnen (2009) and Lokshin and Mohnen (2012) that tax credit policy tends to be more effective in stimulating the R&D investment for small firms than large firms. Based on prior literature, if the government wants to have a stronger effect on R&D,
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