Does fiscal policy matter for business R&D investment? Panel data evidence from Central and Eastern Europe

Abstract

This paper examines the impact of fiscal policy on business investment in research and development (R&D). Panel regression models – with independent variables for the total tax and contribution rate, government appropriations and outlays for R&D, and the R&D tax subsidy rate – are set up to examine cross-country differences in business investment in R&D, with a set of control variables. The latter include, most notably, the number of full-time researchers, tertiary education attainment, the protection of intellectual property rights, governance, the long-term interest rate, and trade openness. The panel encompasses eleven countries of Central and Eastern Europe over ten years (2010–2019). The findings suggest that fiscal policy does not affect BERD, while trade openness, tertiary education attainment, and full-time researcher employment have a significant positive impact. These findings are consistent with some of the earlier studies on the effectiveness of fiscal policy in stimulating business investment, calling for greater allocation of public and private funds for R&D professional development and training programs. Implications for Central European audience: This paper used recent data for eleven Central and Eastern European countries. Therefore, the findings are directly applicable to these countries. As the paper used random-effects generalised least squares estimation for panel data, the findings can be generalised to other countries.