Participation inertia in R&D tax incentive and subsidy programs

We examine how persistent firms’ participation is in R&D subsidy and tax incentive programs, and whether persistence is driven by individual heterogeneity—observed and unobserved—or by state dependence. Using a panel of Spanish manufacturing firms over the period 2001–2008, we estimate a set of dynamic models of program participation. True state dependence of participation in each program is found to be significant, while unobserved heterogeneity accounts for about 41 and 29 % of observed persistence in subsidy and tax credit programs, respectively. Both tend to reach mostly stable R&D performers. We also identify significant differences across programs. Highly productive firms within a given industry are more likely to obtain subsidies; the use of tax credits, in contrast, is unrelated to a firm’s productivity. Our results suggest that R&D tax incentives and R&D subsidies are not substitutes and that any unintended misallocation of support is likely to persist.