Determinants of corporate R&D expenditures: the role of taxes

Fig. 1

Fig. 2

Definitions of variables_

Variable	Definition
R&D	A continuous variable equals to the natural logarithm of the amount of the company's spending on R&D activity, recognised in the Profit & Loss Statement
tax	A variable equals to a relation of paid, due and deferred taxes to total operating revenue. In the case of items where the value was negative, we truncated the variable to 0. The indicator reflects the part of the revenue related to the operating activity, which constitutes taxes. It approximates tax burdens due to the income tax.
tax_spread	A variable equals the difference between the nominal and the effective tax rate; an effective tax rate is a ratio of taxes to gross income (before taxes). The difference reflects the use of tax reliefs available within the tax system of a country.
growth	A dynamic variable reflects the growth opportunities of a firm, defined as a sales growth rate, i.e., a relation of the net sales in a given year to the net sales in the previous year.
ROA	Rate of return on assets, informing about the profitability of the company's assets (relation of generated revenues to assets). It reflects how effectively each one EUR of the capital invested in the company creates new profits.
patent	Number of patents obtained by the firm from the beginning of its existence, defined as a natural logarithm of (1+ number of patents).
age	Number of months since the firm was established divided by the age of the oldest firm in the sample.
cash_flow	Indicator representing the cash flows from operating activities scaled by total sales. It reflects the part of the sale revenues, which the company obtained in the form of real money (cash).
debt	The debt ratio defined as the company's long-term liabilities to its total operating revenue ratio.
industry	Division of companies according to the industry they operate in, based on Statistical Classification of Economic Activities in the European Communities, Rev. 2 (NACE Rev. 2)1 – high-tech, 2 – manufacturing and construction, 3 – water supply, sewerage, waste management and remediation activities; electricity, gas, steam and air conditioning supply, 4 – wholesale and retail trade, 5 – finance and insurance, 6 – ICT information and communication; real estate activities, 7 – professional, scientific and technical activities, 8 – administrative and support service, 9 – services (accommodation and catering services); arts, entertainment and recreation, and other services

Jarque-Berra tests for normality of R&D logarithm_

Variable	Model	Number of observations	Pr(Skewness)	Pr(Kurtosis)	Test χ2	p-value
R&D	1 Germany	209	0.0030	0.8850	8.11	0.0173
	2 Total	351	0.2515	0.8342	1.37	0.5049
	3 France	142	0.9119	0.4380	0.62	0.7329

Instruments of innovation support_

R&D incentives	France	Germany
Tax credits	✓
Cash grants	✓	✓
Loans	✓	✓
Reduced tax rates/preferable tax rates	✓
Reduced social security contributions	✓
Accelerated depreciation on R&D assets	✓
Tax allowance
Infrastructure/land preferential price
Tax deduction
Tax exemptions
Income tax withholding incentives
Patent-related incentives	✓
Financial support
Tax holiday	✓
The expedited government approval process
VAT reimbursement
Qualifies for Horizon 2020 funding	✓	✓
Other

Descriptive statistics of variables_

Variable	Model	Number of observations	Mean	Standard deviation	Min	Max
R&D	1 Germany	209	9.9327	2.0846	6.0039	15.6684
	2 Total	351	9.7378	2.2718	2.4849	15.6684
	3 France	142	9.4088	2.4424	2.3979	15.3560
growth	1 Germany	209	1.0787	0.1732	0.1419	1.8622
	2 Total	351	1.0993	0.2916	0.1419	3.9503
	3 France	142	1.2765	1.4565	0	15.0511
tax	1 Germany	209	0.0209	0.0223	0	0.2249
	2 Total	351	0.0200	0.0226	0	0.2249
	3 France	142	0.0208	0.0213	0	0.0886
cash_flow	1 Germany	209	0.0536	0.4691	−6.6	0.2496
	2 Total	351	−0.1305	1.7295	−27.4894	1.8076
	3 France	142	−0.2092	1.6924	−18.4402	0.4985
ROA	1 Germany	209	5.3605	5.0256	0	25.23
	2 Total	351	4.5955	5.0288	0	37.88
	3 France	142	3.8730	5.8296	0	50.81
patent	1 Germany	209	3.3132	3.0014	0	12.1611
	2 Total	351	3.1978	2.8336	0	12.1611
	3 France	142	3.0408	2.5391	0	9.2757
debt	1 Germany	209	0.2060	0.3514	0	3.1568
	2 Total	351	0.2852	0.7245	0	8.7687
	3 France	142	0.3430	0.8987	0	7.5436
age	1 Germany	209	0.2172	0.2166	0.0124	1
	2 Total	351	0.2061	0.1786	0.0124	1
	3 France	142	0.3977	0.2121	0.0642	0.9931
tax_spread	1 Germany	209	0.1078	0.1285	0	0.33
	2 Total	351	0.1348	0.1362	0	0.33

Corporate R&D expenditures relationship with income tax_

Variable spread sensitive to age, and IP protection in different industries	R&D	R&D
	(1) Germany	(2) Germany and France
tax_spread # age	7.5442***
	(4.5114)
patent # prof&scien	−0.342***	−0.1403**
	(0.086)	(0.0586)
patent # high-tech	−0.2542**
	(0.1264)

Determinants of corporate R&D expenditures_

Variable	R&D	R&D	R&D
	(1)Germany	(2)Germany and France	(3)France
cash_flow	0.8328***	0.0416*	−0.0739
	(0.2988)	(0.0217)	(0.1051)
growth	2.3007***	−0.2544	−0.2017*
	(0.6937)	(0.3276)	(0.1154)
age	0.447	1.1234**	2.513***
	(0.7627)	(0.5207)	(0.8563)
debt	0.9604**	−0.1587	−0.6826***
	(0.4269)	(0.1069)	(0.2000)
ROA	−0.065**	−0.0509***	−0.0659**
	(0.0262)	(0.016)	(0.0301)
patent	0.4846***	0.4803***	0.4682***
	(0.0628)	(0.0446)	(0.065)
tax (current and deferred)	12.013*	15.45***	28.0578***
	(6.1376)	(3.3793)	(9.2165)
tax_spread	−2.8787**	−2.0161***	insignificant
	(1.2828)	(0.7495)
industry	YES	YES	YES
manufactury	−1.555***	−1.2875***
	(0.3749)	(0.2806)
trade	−2.0148***	−1.8409***
	(0.6158)	(0.4493)
finance			1.5965***
			(0.4914)
ICT			1.6046**
			(0.5306)
prof&scien			1.6016***
			(0.3909)
const	6.8698***	9.2393***	6.1104***
	(0.7949)	(0.4394)	(0.4901)
N (number of observations)	209	351	142
R2	0.4624	0.4012	0.4947
Test	Test statistic (p-value)
RESET	0.77	2.28	1.73
	(0.5105)	(0.0791)	(0.1637)
Breusch–Pagan test	0.29		0.54
	(0.5888)		(0.4617)