Taxation and innovation: evidence from Colombia

Title: Taxation and innovation: evidence from Colombia
Format: Journal Article
Publication Date: November 2022
Published In: Economics of Innovation and New Technology
Publisher Taylor & Francis


We use firm-level data from a Colombian manufacturing survey, complemented with data from the tax department, to test the effect of firms’ total tax and contribution rate (TCR) on the ratio of innovation expenditures to sales. We construct a data panel from 2003 to 2018 comprising 104,762 observations and implement fixed effects and instrumental variables estimation methods. Our results suggest that an increase of one percentage point in direct taxation leads to a decrease of 0.10% in the probability that firms engage in innovation investments, and market power moderates this effect. We discuss distinctive features of the effect of taxation on innovation in emerging economies—one being the inability of local innovation clusters to temper it. Policy implications include considering modifications to the magnitude and composition of the TCR as an alternative to R&D tax credits.

Ivan Allen College Contributors:
External Contributors: Bryan Hurtado, Javier Avila-Maecha

Sergio Pelaez, Bryan Hurtado & Javier Avila-Maecha (2022) Taxation and innovation: evidence from Colombia, Economics of Innovation and New Technology, DOI: 10.1080/10438599.2022.2145560

Related Departments:
  • School of Public Policy