This paper studies R&D tax credit focusing on corporate external financing ability. It analyzes theoretically and empirically how external financing ability of a firm can affect the effects of R&D tax credit. I set up a q-theory type of model that analyzes a firm maximizing its value by choosing optimal R&D spending. The model shows that in case of costly external financing, firms could not increase their R&D as R&D tax credit rate gets high. Empirical evidence corroborates the argument. By taking advantage of introducing a new R&D tax credit bracket for medium size firms in 2009 Korea, I run diff-in-diff analysis. I show that listed firms, which have easy accessibility to external capital market, increased R&D more than non-listed firms after introducing the new tax credit bracket.

This paper implies that reducing firms’ financing costs is crucial for improving the effects of R&D tax credit. Direct subsidy on R&D might not be desirable because moral hazard might arise. Easing on flow of capital to R&D active firms is appropriate by enhancing financial market.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Current Status of R&D Tax Credits
　Section 1 Comparison of R&D Tax Credits Across Major Countries
　Section 2 R&D Tax Incentive Schemes in Major Countries
　Section 3 Korea’s R&D Tax Credit System
　Section 4 Conclusion

Chapter 3 Basic Model of Corporate Decision-Making
　Section 1 Theoretical Framework
　Section 2 Model Analysis and Results
　Section 3 Conclusion

Chapter 4 Complete Model of Corporate Decision-Making
　Section 1 Analysis of the Complete Model
　Section 2 Simulation Analysis
　Section 3 Conclusion

Chapter 5 Empirical Analysis
　Section 1 Data Analysis
　Section 2 Panel Regression Analysis
　Section 3 Difference-in-Differences Analysis
　Section 4 Conclusion

Chapter 6 Conclusion and Policy Implications

References
Appendix
ABSTRACT