Evaluation of the Norwegian SkatteFUNN scheme Torbjørn Hægeland, Statistics Norway Jan 22, 2004

What is SkatteFUNN?  A system for tax deduction of R&D expenses in all enterprises  Warranted by taxation laws  18 percent tax deduction of R&D expenses up to NOK 4 millions. If joint project with an approved R&D institution, the upper limit is NOK 8 millions  Smaller enterprises 20 percent deduction  <250 employees, turnover< € 250 mill or balance sheet total < € 27 mill, not owned more than 25 percent by larger enterprise

What is SkatteFUNN? (cont.)  Launched in 2002 – SMEs only  Extended to all enterprises in 2003  Simple application and reporting procedures  Two weeks for application processing  2002: 2600 projects  2003: 4500 projects (expected) with expenses totalling NOK 8 billions, tax deductions 1.6 billions  How much of this is projects that already were or would be initiated even without the tax deduction scheme?

The evaluation  Initiated by the Ministry of Finance and the Ministry of Trade and Industry  Norwegian Research Council administrates the evaluation  Evaluation period: 2004 – 2007  Evaluator: Statistics Norway

Main issues to be addressed  Additionality: Does SkatteFUNN generate more R&D and change in R&D behaviour in enterprises?  Returns: How does SkatteFUNN projects pay off?  Real R&D or reclassification of costs?  Does SkatteFUNN stimulate knowledge transfer from R&D institutions to enterprises?  How does SkatteFUNN work together with other R&D stimulating measures?  Administrative costs

Empirical strategies  Extensive use of comprehensive micro data bases for firms and plants  Many based on administrative registers  In addition: Manufacturing censuses, R&D surveys innovation surveys etc.  Use of common identifiers facilitates extensive linking of different data sources  Results in a unique panel data base for firms and plants, covering also a long period prior to the launching of the SkatteFUNN scheme  Special surveys to cover aspects of the scheme not covered by existing data sources

Additionality  A key point in the evaluation  Important criterion in itself, cf. polict goals  Additionality a ”necessary condition for success”  Greatest hope for ”precise and definitive answers”  Counterfactual question: What would R&D investments have been without SkatteFUNN?  Non-experimental setting – no formal control group  Strategies:  Econometric evaluation  Surveys and interviews

Additionality (cont.)  Before-after studies  Predict R&D investments using firm-specific variables, business cycles, tax rules etc.  I.e: Control for the effects of other factors on R&D, and isolate the effect of the SkatteFUNN scheme  ”Quasi-experiments”  Utilize discontinuities in the scheme –Differences between small and large firms (particularly in 2002) –Limits on the tax deduction gives difference in incentive effect

Additionality (cont.)  Two possible effects  Effects given firm behaviour (”first order effect”)  Change in firm behaviour, i.e. SkatteFUNN alters the relation between R&D and other variables (”structural breaks”)  Additionality may be non-uniform, and vary with  Firm characteristics: Industry, region, workforce, previous R&D, ”absorptive capacity”  Environmental characteristics: Industry structure, ”nearby R&D”, access to qualified personnel  Type of project: Own project vs cooperation with research institute  Time horizon: Short- and long-term additionality (adjustment costs and learning)

Additionality (cont.)  Sample of SkatteFUNN-firms asked about their experiences, and whether the tax deduction has led to more R&D  Compare to econometric analyses

Returns to SkatteFUNN projects  The potential effects come in three steps 1. Increased R&D investments 2. Increased pace of innovations 3. Effects on profitability  More demanding to identify and quantify than input additionality  Effects are more delayed  Effects may appear other places than in the enterprise (externalities)  Mainly econometric analyses

 Quantifying externalities  Difficult task  Construct measures of ”relevant external R&D”  How does such variables contribute to explain innovation, profits and productivity?

Change in R&D behaviour  Does participation in SkatteFUNN projects change the way firms organize their R&D activity, and how R&D decisions are made?  Survey among participating firms

The role of research institutes  Extra incentive to cooperation between firms and research institutes  Rationale: Assumption of larger effects  Separate econometric estimates of additionality and returns for joint projects and ordinary projects  Qualitative survey:  What promotes/hinders cooperation?  Do the institutes change their strategies)

The interplay between SkatteFUNN and other policy measures  Are there differences wrt. input additionality and returns between tax incentives and direct support, and do they stimulate different kinds of R&D?  Are the different measures complements or substitutes?  Is SkatteFUNN a ”low threshold measure”?  Many firms that receive support through SkatteFUNN has never received R&D support before. Will these firms apply for other types of R&D support later on?

Evaluation output  Interim reports and reports from partial analyses  Final report in 2007  Main questions: –Should SkatteFUNN be continued? –If yes, should it be modified  Policy recommendations must take into account variations in:  How directly effects can be observed and identified  When effects occur. Not all effects can be observed within the evaluation period