Essays on Policies Targeting the Knowledge-Based Economy

Abstract

The first chapter examines the impacts of stringent size requirements to qualify for R&D tax credits on firms' growth decisions. I leverage a 2004 eligibility change in Canada's largest R&D program, which allowed firms below the initial threshold to increase production and R&D spending while maintaining eligibility for a 35 percent subsidy. Using firm-level data, I find no short-term impact on R&D spending, but a significant 8% increase in productivity per worker post-reform. The results are driven by less financially constrained firms, emphasizing that firms were artificially limiting their growth to stay eligible. Looking at mechanisms to explain how firms decided to grow, I find that firms tended to increase their current production but did not conduct more long-term investment. The second chapter builds on the first to understand how productivity gains impacted firms' pay and hiring policies. On average, firms raised earnings by around 2 percent, translating to about 1,100 CAD per worker. Using the reform as an instrument for firms' value-added level, I recover rent-sharing elasticities that range between 0.17 and 0.23. No employment effect is detectable post-reform. Within firms, the lower earnings quartiles saw larger increases. The productivity gains also led firms to pay new hires about 2.2 percent more and to recruit from better firms, though they did not hire better individual workers. Combining these results with Chapter 1 suggests that firms restricted their production to maintain eligibility for the generous R&D program, possibly by reducing the number of hours worked. The third chapter quantifies the reallocation effect of high-tech industrial policies targeting a segment of the IT sector. Exploiting a 2008 reform in Quebec that introduced a wage subsidy for all IT firms, with stringent criteria for non-software firms, I find that IT sector earnings increased significantly, although with no observable employment effect. Breaking down the IT sector between software and non-software firms, I find that most of the employment gains in the software industry are offset by declines in non-software industries. Heterogeneity by age group confirms that younger workers gained more and were more prone to reallocate across targeted and non-targeted industries.