The Innovation Impacts of R&D Tax Credits in the UK

Weixi Liu; Marc Cowling; Ning Zhang

doi:10.1111/radm.70008

The Innovation Impacts of R&D Tax Credits in the UK

Weixi Liu, Marc Cowling, Ning Zhang

Research output: Contribution to journal › Article › peer-review

Abstract

Strategic managers of SMEs face a number of barriers to successful R&D, and the high cost of funding R&D projects due to their technological uncertainty is a critical one. To alleviate this problem, the UK government introduced R&D tax credits for firms with innovation projects that are scientifically or technologically uncertain in 2000, and this scheme has remained in place ever since. In this paper, we use a large longitudinal SME data set for the UK to test whether R&D tax credits have been successful in stimulating more innovation, whether they have impacted more on process or product innovation, and if they have promoted radical as opposed to incremental innovation. Our findings show that R&D tax credits are associated with product and process innovation, and also radical innovation of both types. It was also the case that the R&D tax credit effect took time to manifest itself in superior innovation outcomes. In general, the positive impact of R&D tax credits in the UK on firm-level innovation is most apparent when firms also leverage external advice specifically related to innovation and strategy.

Original language	English
Number of pages	16
Journal	R and D Management
Early online date	18 Jul 2025
DOIs	https://doi.org/10.1111/radm.70008
Publication status	Published - 18 Jul 2025

Bibliographical note

Publisher Copyright:
© 2025 The Author(s). R&D Management published by RADMA and John Wiley & Sons Ltd.

Data Availability Statement

The data that support the findings of this study are available in UK DataService at https://ukdataserv ice.ac.uk. These data were derived fromthe following resources available in the public domain: LongitudinalSmall Business Survey, 2015–2023. https:// beta.ukdataserv ice.ac.uk/datacatalogue/studies/study?id=7973

Funding

Marc Cowling and Weixi Liu would like to acknowledge the support by UK Research and Innovation (UKRI) and UK Economic and Social Research Council (ESRC), for the project “Understanding how constraints on access to finance and under‐investment impact on productivity growth in smaller firms” (ES/W010259/1).

Funders	Funder number
UK Research and Innovation
Economic and Social Research Council	ES/W010259/1

Keywords

R&D
SMEs
cost of capital
innovation
tax credits

ASJC Scopus subject areas

Business and International Management
General Business,Management and Accounting
Strategy and Management
Management of Technology and Innovation

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1111/radm.70008Licence: CC BY

Cite this

@article{e90b5351ac674b71b0b058c64f62b944,

title = "The Innovation Impacts of R\&D Tax Credits in the UK",

abstract = "Strategic managers of SMEs face a number of barriers to successful R\&D, and the high cost of funding R\&D projects due to their technological uncertainty is a critical one. To alleviate this problem, the UK government introduced R\&D tax credits for firms with innovation projects that are scientifically or technologically uncertain in 2000, and this scheme has remained in place ever since. In this paper, we use a large longitudinal SME data set for the UK to test whether R\&D tax credits have been successful in stimulating more innovation, whether they have impacted more on process or product innovation, and if they have promoted radical as opposed to incremental innovation. Our findings show that R\&D tax credits are associated with product and process innovation, and also radical innovation of both types. It was also the case that the R\&D tax credit effect took time to manifest itself in superior innovation outcomes. In general, the positive impact of R\&D tax credits in the UK on firm-level innovation is most apparent when firms also leverage external advice specifically related to innovation and strategy.",

keywords = "R\&D, SMEs, cost of capital, innovation, tax credits",

author = "Weixi Liu and Marc Cowling and Ning Zhang",

note = "Publisher Copyright: {\textcopyright} 2025 The Author(s). R\&D Management published by RADMA and John Wiley \& Sons Ltd.",

year = "2025",

month = jul,

day = "18",

doi = "10.1111/radm.70008",

language = "English",

journal = "R and D Management",

issn = "0033-6807",

publisher = "Wiley-Blackwell Publishing Ltd",

}

TY - JOUR

T1 - The Innovation Impacts of R&D Tax Credits in the UK

AU - Liu, Weixi

AU - Cowling, Marc

AU - Zhang, Ning

PY - 2025/7/18

Y1 - 2025/7/18

N2 - Strategic managers of SMEs face a number of barriers to successful R&D, and the high cost of funding R&D projects due to their technological uncertainty is a critical one. To alleviate this problem, the UK government introduced R&D tax credits for firms with innovation projects that are scientifically or technologically uncertain in 2000, and this scheme has remained in place ever since. In this paper, we use a large longitudinal SME data set for the UK to test whether R&D tax credits have been successful in stimulating more innovation, whether they have impacted more on process or product innovation, and if they have promoted radical as opposed to incremental innovation. Our findings show that R&D tax credits are associated with product and process innovation, and also radical innovation of both types. It was also the case that the R&D tax credit effect took time to manifest itself in superior innovation outcomes. In general, the positive impact of R&D tax credits in the UK on firm-level innovation is most apparent when firms also leverage external advice specifically related to innovation and strategy.

AB - Strategic managers of SMEs face a number of barriers to successful R&D, and the high cost of funding R&D projects due to their technological uncertainty is a critical one. To alleviate this problem, the UK government introduced R&D tax credits for firms with innovation projects that are scientifically or technologically uncertain in 2000, and this scheme has remained in place ever since. In this paper, we use a large longitudinal SME data set for the UK to test whether R&D tax credits have been successful in stimulating more innovation, whether they have impacted more on process or product innovation, and if they have promoted radical as opposed to incremental innovation. Our findings show that R&D tax credits are associated with product and process innovation, and also radical innovation of both types. It was also the case that the R&D tax credit effect took time to manifest itself in superior innovation outcomes. In general, the positive impact of R&D tax credits in the UK on firm-level innovation is most apparent when firms also leverage external advice specifically related to innovation and strategy.

KW - R&D

KW - SMEs

KW - cost of capital

KW - innovation

KW - tax credits

UR - http://www.scopus.com/inward/record.url?scp=105011079277&partnerID=8YFLogxK

U2 - 10.1111/radm.70008

DO - 10.1111/radm.70008

M3 - Article

SN - 0033-6807

JO - R and D Management

JF - R and D Management

ER -

The Innovation Impacts of R&D Tax Credits in the UK

Abstract

Bibliographical note

Data Availability Statement

Funding

Keywords

ASJC Scopus subject areas

UN SDGs

Access to Document

Other files and links

Fingerprint

Cite this