Do R&D tax credits impact pharmaceutical innovation? Evidence from a synthetic control approach

Research and Development (R&D) in pharmaceuticals has often been judged as suboptimal due to barriers to entry, including the required investment size and other factors that cause the market to fail. R&D tax credits are one of the push methods governments use to incentivise innovation fiscally. R&D tax credits for the life sciences industry aim to promote innovation by reducing R&D costs and increasing expected returns. The underlying argument is that these incentives ultimately benefit the population's health while generating economic activity. However, the literature has yet to capture precisely the effects on innovation caused by this policy instrument. This paper studies the impact of the Research and Development Expenditure Credit scheme introduced in the UK in 2013. We use the synthetic control method to compare innovation output in the UK, measured by the number of new clinical trials, to an ad hoc control created using a group of comparable countries. Results indicate that the scheme increased the number of new phase I clinical trials by about 46 % one year after implementation. The treatment effect was weaker two years after the initiative's enactment but still present. A smaller lagged effect on phase II trials was also observed, by which trials increased by 32 % four years after the policy implementation. The positive effect was significant in the short run for phase I and phase II trials but not significant for phase III trials. Overall, the results suggest that, under certain circumstances, R&D tax credits can be helpful in stimulating innovation in the pharmaceutical sector.