Small firms need to access R&D subsidies to grow, but if they grow, then they cannot continue to access R&D subsidies. Minor changes to eligibility constraints can and do address the catch-22 situation. That is according to new research by Alexandre Lehoux, a PhD candidate with the Department of Economics at the University of Toronto.
Lehoux examined how eligibility reforms to Canada’s largest R&D program in 2004 allowed firms to increase their production while maintaining eligibility for the program. He found the changes made no impact on R&D spending in the short-term, but that there were significant increases in value-added per worker following the reform. The key benefit to workers? Income improvements by around 2% after the reform.
“An important finding of my paper is that less financially constrained firms were the most responsive in expanding their production following the reform. This result emphasizes how the initial eligibility threshold was introducing what could be called a ‘growth tax’ for these firms,” Lehoux explained.
“Alexandre’s paper produces cutting-edge research on the impacts of R&D subsidies on firms and workers,” said Kory Kroft, Professor of Economics at the University of Toronto and Lehoux’s dissertation supervisor. “His findings indicate that subsidies which target small firms can prevent these firms from growing to maintain their eligibility. Relaxing eligibility constraints leads firms to expand production and he finds that workers capture some of these productivity gains.”
The research and results are outlined in Lehoux’s job market paper, Reluctant to Grow: The Unintended Effects of R&D Tax Credits Targeting Small Firms. The job market paper (JMP) is a unique feature of the economics discipline in which PhD candidates re-structure key chapters of their dissertation for academic search committees. Lehoux and seven other PhD candidates from the Department of Economics at the University of Toronto are coming onto the job market this year. Economic research like Lehoux’s can influence government policy development and policy reform.
“A key skill of Alexandre’s is his ability to identify tax reforms and then examine how workers and firms are impacted by them using high quality administrative data,” said Kroft. He has quite a bit of institutional knowledge of the Canadian tax code, and this will serve him well throughout his career.”
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