This Working Paper assesses the impact of public support for R&D activities on the educational mix of R&D employees in private companies in Belgium. Estimations show that some tax incentives significantly raise the share of researchers holding a PhD. There are indications that holders of PhDs substitute for R&D employees with a lower education degree. It is also shown that controlling for changes in the educational mix of R&D personnel lowers estimates of the impact of public support on the average wages of researchers.
Acknowledging the fundamental role of research and development (R&D) in technological progress, and well-known market failures in knowledge creation, a large majority of OECD countries provide direct or indirect support for R&D activities of private companies. Most studies that evaluate public support focus on the extent to which subsidies or tax incentives foster R&D projects that companies would not have carried out without support (so-called input additionality). Some recent studies consider output additionality, in effect, the impact of public support for R&D on product and process innovation or productivity. The possible effects of public support on R&D behaviour - for example, shifting R&D activities towards more risky and potentially more profitable projects - are studied by even fewer scholars.
Between 2005 and 2007, the Belgian federal government introduced four distinct measures that provide partial exemption from withholding tax on the wages of researchers. The measures in support of R&D collaboration or of Young Innovative Companies are rather general, but for the two other measures, only researchers with a specific educational degree are eligible (for example, PhDs and masters' in exact or applied sciences or civil engineering). These measures affect the relative wage cost of specific groups of R&D personnel and thereby relative demand. If the supply of some inputs is inelastic, the rising demand for these inputs due to targeted incentives may increase factor prices (wages).
The results presented in this paper show that some measures of public support indeed affect the composition of R&D personnel in companies. There are some indications of substitution of PhD holders and civil engineers for R&D employees with a lower degree. Although firms are free to decide how to use the money freed by the partial exemption from withholding tax on the wages of researchers, the partial exemption for researchers with a PhD or civil engineering degree is found to have a substantial positive impact on the share of researchers with that specific degree. The partial exemption for researchers with a master's degree, on the other hand, is not found to have had a statistically significant impact on the number of R&D employees or the share of researchers with a master's degree. In line with previous studies, we find evidence that public support increases the average wage of researchers. Our results, however, clearly show the need to disentangle the impact on wages due to changes in the educational mix of R&D personnel from the impact public support may have by increasing demand for researchers when supply is inelastic. If data over a longer period become available, possible changes in the supply of researchers could be taken into account in the assessment of the impact of public support for R&D on the educational mix of R&D personnel.
A more in-depth estimation of the impact of changes in the educational mix of R&D personnel on the orientation of R&D activities (e.g., the share of R&D dedicated to basic research, applied research or experimental development) seems warranted. Further analysis is also necessary to shed light on whether or not changes in the educational mix translate into changes in innovative performance. This would help in the debate on the relation between policy support and the wages of R&D personnel, in effect, the extent to which rising wages reflect the rising education level of researchers and whether the latter has a positive impact on the long-term innovative capacity of firms.