ESTIMATING THE IMPACT OF THE RESEARCH-AND-DEVELOPMENT TAX CREDIT ON STRATEGIC GROUPS IN THE PHARMACEUTICAL-INDUSTRY

The Economic Recovery and Tax Act of 1981 provided a 25 percent tax cr edit for increases in research and experimentation expenditures. Previ ous studies have shown considerable controversy about the effectivenes s of various tax credits. This study focuses on the response of the st rategic groups in the pharmaceutical industry to the credit. Four stra tegic groups were formed using different levels of research intensity (research/sales). and relative cash flow margin (cash flow/sales). The change in research intensity following enactment of the tax credit wa s estimated. The analysis found that the tax credit caused an increase in R&D expenditures. In addition, the R&D tax credit appears to have contributed to increased competitive R&D spending among the firms in t he pharmaceutical industry.