R&D Tax Incentive: A Way of Increasing R&D in Lithuania

This paper analyses the recently approved Lithuanian profit tax incentive for research and development [R&D] and measures the possible increase in business R&D intensity in the country due to the before mentioned tax incentive. Apart from this, it provides the expert opinion on the importance of other factors that influence the level of business R&D expenditure in the country, such as the human capital, protection of intellectual property rights, market size, availability of bank credits and many others, as well as analyses the possible reasons behind the extremely low business R&D intensity in Lithuania. In addition to this, the paper emphasises the importance of the government intervention into the market by providing financial support to the companies that conduct R&D and explains the significance of the positive externality R&D creates and the benefits it brings to the society. The slowdown of the Lithuanian economy requires urgent actions by the Lithuanian Government and the increase in the innovation level through R&D is a way of ensuring further economic growth of the country. By using the B-Index model and the price elasticity of R&D adopted from the previous studies of OECD countries, we find that the implementation of the R&D tax incentive will lead to an increase in the Lithuanian business R&D intensity, however, the increase will be considerably larger in the long-run than in the short-run. After calculating the generosity of the Lithuanian R&D tax incentive and... [to full text]