UNIDE - ECR
AV FORÇAS ARMADAS
Lisbon University Institute
Felipa de Mello-Sampayo
National R&D Subsidies versus
Foreign R&D Tax Credits
Sofia de Sousa-Vale
Working Paper - 01/08
- Lisbon University Institute
Accelerating Innovation: National R&D Subsidies versus Foreign
R&D Tax Credits∗
Felipa de Mello-Sampayo†, Sofia de Sousa-Vale†
and Francisco Camões†
† ISCTE - Higher Institute for Labour and Business Studies
June 14, 2007
This paper examines and compares the impact on growth of government’s funding na-
tional R&D or providing a tax rate reduction for foreign investment in R&D. In an innovation-
based model we show the relation between the costs of these two policies. One meaningful
policy implication of our results is that, to accelerate innovation, governments should adopt
a tax rate deduction for foreign R&D, rather than subsidizing national R&D, because the
former is more economical and effective than the latter.
JEL Classification: F21; H21; O40.
Keywords: Endogenous Growth; Foreign Direct Investment; Taxes.
Postal address: ISCTE, Department of Economics, Av. Forças Armadas, 1649-026, Lisbon,
∗We acknowledge with thanks the financial support of the Science and Technology Foundation - UNIDE.
Corresponding author’s email: firstname.lastname@example.org
The emergence of a knowledge-based economy implies that economic success can only be sus-
tained if supported by a perennial capacity to innovate and create proprietary assets. Literature
in growth theory points to research and innovation as the engine of growth. Acknowledging
that innovation is the key to business growth, governments start pursuing R&D strategies. Eu-
ropean governments, under the Lisbon Strategy, are working together with funding agencies,
regulatory authorities, academia and industry to create a fast-growing, dynamic research en-
vironment. The main