Católica Lisbon research awarded best paper on “Impacto da Ciência na Economia e na Sociedade em Portugal” by the Portuguese Government and the Fundação para a Ciência e Tecnologia

A research on the impact of R&D tax credits on Portuguese firms and workers by Joana Silva and Anna Bernard, Professors at CATÓLICA-LISBON and director and vice-director of Católica-Lisbon Research Center of Economics for Prosperity (PROSPER), and Rahim Lila (Economist at Charles Rivers Associate, Canada) was awarded the prize of best paper on “Impacto da Ciência na Economia e na Sociedade em Portugal” by the Portuguese Government, Portuguese Gabinete de Estratégia e Estudos (GEE), and the Fundação para a Ciência e Tecnologia. This recognition not only signifies the excellence of their work but also its tangible influence on policy discussions. 

Their research paper, titled "Employment versus Efficiency: Which Firms should R&D Tax Credits Target?" was awarded in a competitive call distinguishing four papers. The paper is the result of the project - Avaliação dos Efeitos dos Programas de Incentivo às Empresas no Desempenho Empresarial" (POAT-01-6177-FEDER-000057). It builds on Rahim Lila's master thesis co-supervised by Anna Bernard and Joana Silva, which garnered a nomination for the distinguished Best Master's Thesis Award in Economics in 2022 - the prestigious Prémio Silva Lopes, presented by the Bank of Portugal. 

Receiving the prize for the best research in terms of “Impacto da Ciência na Economia e na Sociedade em Portugal” makes us very proud. It highlights the national impact of our work and of PROSPER research center. It stands as a recognition of expertise and valuable contributions of both Católica’s professors and students. The competitive nature of the award reinforces their academic journey and amplifies the recognition accorded to PROSPER. - Joana Silva

Which Firms should R&D Tax Credits Target to foster innovation, employment and efficiency? 

According to the paper's conclusions these R&D tax credits have a significant impact on stimulating private sector innovation, which in turn influences employment and firm performance. The study offers a comprehensive exploration of how these credits impact firms, delving into areas such as technology adoption, performance metrics, and workforce composition. A key focus is directed towards the size of the firms involved in these dynamics. By analyzing extensive longitudinal micro-data encompassing innovation, firms, and their workforce, and employing a meticulous methodology that combines matching with a staggered adoption differences-in-differences approach, the research unveils intriguing insights. 

One noteworthy revelation is that tax credits boost R&D-related investments during the funding period but not afterward. Notably, large firms experience increased productivity and efficiency without substantial employment growth, primarily due to structural changes that include a higher proportion of skilled workers and enhanced technological adoption. Conversely, small firms respond by expanding employment and production scale. These findings highlight a crucial trade-off: R&D tax credit programs targeting large firms tend to result in efficiency and productivity gains but have limited effects on employment. In contrast, programs benefiting small firms may boost employment but have limited impact on structural improvements in productivity and efficiency. 

Policy Implications 

The paper, beyond its academic merit, carries crucial policy implications. The research findings suggest that R&D tax credit aiming at fostering employment should target small firms, while those aiming at improving production efficiency should be targeted towards larger firms. They also highlight the significant and enduring transformations brought about by the R&D program. The increase in human expertise and the adoption of advanced technologies underscore the program's potential for far-reaching, long-term consequences for firms. Although companies may not sustain elevated R&D investment levels once they exit the program, the impact of the program is likely to leave a lasting imprint on these organizations. 

We believe our research led to new insights that contribute to the debate on how to implement efficiently public policies to support firms. The fact that our article is disseminated through GEE’s series of working paper help making that bridge between academia and other stakeholders. – Anna Bernard

Article written by Daniela Guerra, Science Communicator at CUBE 