179 NTU Management Review Vol. 31 No. 2 Aug. 2021 it should adopt tax credits rather than direct subsidies. In fact, the Biopharmaceutical Act primarily uses tax credits, which appears to be a good decision. After the empirical examination, we confirm the policy effectiveness of the Biopharmaceutical Act, especially for biopharmaceutical firms with more serious R&D underinvestment problems. In addition, studies show that the stimulating effect of tax credits is more rapid than that of direct subsidies (David et al., 2000). Our finding of a short run effect for the Biopharmaceutical Act confirms this result. In conclusion, our empirical findings of the promoting effect of the Biopharmaceutical Act on innovation activities, support the theories regarding private R&D underinvestment. This Act offers tax credits for R&D investment and holding shares of biopharmaceutical firms, and grants tax credits to the top executives and technology investors for new shares in biopharmaceutical firms. The tax credit regulations reduce the cost of R&D investment and increases equity financing opportunities. Thus, the increasing innovation activities resulting from tax credit regulations support the financial constraint theory in explaining the problem of R&D underinvestment. In addition, the Biopharmaceutical Act offers non-tax credit preferential treatments to reduce the agency problem (i.e. it stimulates managers’ motivation) and to increase the incoming spillover effect by increasing cooperation opportunities. These non-tax credit treatments tend to support the agency theory and spillover theory in explaining R&D underinvestment. In this paper, discriminating between the tax credits and non-tax credits in exploring the stimulus effect of the Biopharmaceutical Act enables us to determine which theory better explains the R&D underinvestment. However, we do not obtain detailed information about the deduction of tax payment and the collaboration information between industries and academic institutions, and thus could not directly examine this interesting topic.
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