Encouraging Innovation Among SMEs and Its Implications for (De) carbonization Efforts: Experimental Evidence from Germany’s R&D Tax Credit Program

Germany’s 2020 R&D tax credit offers eligible firms up to €2.5 million annually, corresponding to 25 per cent of a maximum firm tax base of €10 million. SMEs qualify for enhanced rates up to 35%, potentially yielding even larger tax relief. Yet 75% of R&D-active SMEs have never applied. This high non-participation rate, despite substantial available funding, points to significant information frictions that may disproportionately disadvantage smaller firms. We test whether low-cost information interventions can help close this gap. Using a randomized encouragement design targeting patent-holding firms, we estimate the effect of these interventions on application rates and assess their cost-effectiveness relative to passive dissemination. Our pilot study thus provides initial results of the feasibility of using such regulatory sandbox provisions to boost innovation in Germany, and
provides evidence to inform a larger-scale RCT with the German Federal Environmental Foundation.

Key facts

Principal Investigator: Nils Handler
Co-PI: Frank Otieno Odhiambo, Yingjia Zhu, Haizhou Zheng
Affiliation: University of Zurich