The short-run effects of public incentives for innovation in Italy

Investing in innovation is considered as a crucial step for economic growth of a country; yet there is little consensus in the literature on the short-run effectiveness of tax benefits for innovative firms. For this reason, this study evaluates an Italian public program introduced in 2012 aimed at fostering young innovative firms. A discontinuity in the eligibility rules generates a quasi-experimental design, which allows us to estimate the causal effects of the policy. The results show an increase in the number of partners, and therefore generation of new investors, but no significant effects on firms’ share of intangible assets, turnover, or number of employees. These developments are driven by a generous tax benefit offered by the policy to investors with no strict requirements. We conclude that a policy that links tax cuts to actual investments in innovation is necessary to achieve the policy maker’s target.