The Impact of State-Level R&D Tax Credits on the Quantity and Quality of Entrepreneurship
The acceleration of start-up activity is often cited as a rationale for the R&D tax credit, a key innovation policy instrument adopted increasingly by US states over the past quarter century. While there is a strong empirical base linking the R&D tax credit to increased R&D expenditures and innovation, prior work has not provided causal evidence that this policy effects the rate of formation and growth potential of new businesses. This paper combines data from the US Startup Cartography Project with the Panel Database on Incentives and Taxes to implement a difference-in-differences estimate of the impact of the R&D tax credit on the quantity and quality-adjusted quantity of entrepreneurship. Our key finding is that the R&D tax credit is associated with a significant long-term impact on both the overall quantity and quality-adjusted quantity of entrepreneurship, with the bulk of the effect materializing more than five years after the policy is enacted. These findings stand in contrast to an analysis of the adoption of state-level investment tax credits. There, we observe no long-term impact on the quantity of entrepreneurship but a marked decline in the rate of formation of growth-oriented startups over time. Combined with other evidence regarding the efficacy of R&D tax credits in spurring innovative investment, our results shed light on the potential for this fiscal policy to also stimulate the formation of growth-oriented start-ups.
We thank Evan Absher, Brian Asquith, Tim Bartik, George Erickcek, Lee Flemming, Evan Mast, and Peter Orazem, for helpful comments, as well as participants in the UpJohn Institute Conference on the Effects of State and Local Tax Incentives on Business Location Decisions, and the Kauffman Uncommon Methods and Metrics meetings. Yu-Ting Cheng and Yupeng Liu did excellent research assistantship in this project. We also acknowledge and thank the Kauffman Foundation for their support of our research agenda, including the Uncommon Methods and Metrics grant that supported this project, and we also thank the Jean Hammond (1986) and Michael Krasner (1974) Entrepreneurship Fund and the Edward B. Roberts (1957) Entrepreneurship Fund at MIT for their support. All errors and omissions are of course our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Scott Stern periodically receives compensation for speaking about or consulting about innovation policy and the Startup Cartography Project, typically at events organized by government agencies or other institutions involved in the policy process. He also receives compensation from the MIT Regional Entrepreneurship Acceleration Program, which features this project.
- State-level credits increase average entrepreneurial activity by around 7 percent; counties in states with R&D credits experience...