Giving companies R&D credits makes them more likely to acquire startups

Companies that receive research and development (R&D) credits are more likely to acquire venture capital (VC)-backed startups alongside investing in their own R&D, according to new research from ESMT Berlin. It is said to be much higher.

These findings, available as a working paper, were published by Melih Seviril, professor of finance at ESMT Berlin and head of the law, regulation and factor markets department at the Halle Institute for Economic Research (IWH), and IWH colleague William This was revealed through research by Mr. McShane.

Researchers wanted to understand how established companies contribute to the startup ecosystem and identify what role R&D credits play in this market. .

To do so, we used 25 years of data from more than 3,500 U.S.-based companies that receive research and development-related tax credits. Seviril and McShane then use mergers and acquisitions (M&A) platforms, such as Thomson Reuters M&A Data, to examine acquisitions by these companies that received tax credits and how they can take advantage of this tax break. I understood what was going on.

They found that M&A spending by these companies was on par with R&D spending in their sample, averaging $104.5 million and $115.18 million annually, respectively.

Meanwhile, the researchers also found that a one standard deviation change in the tax-based cost of R&D capital is associated with an approximately 10.6% decrease in the expected number of acquisitions for VC-backed firms. This clearly shows that as R&D taxes increase, firms are less likely to acquire startups.

Interestingly, large organizations were only interested in using these tax credits to invest in VC-backed startups, while ignoring non-VC-backed companies.

“For companies that receive R&D credits, much of the expenditure will be on human capital, i.e. wages and expenses for inventors,” Professor Sebiril says. “However, there is no guarantee that this R&D investment will prove cost-effective or generate new developments. It may make more sense to acquire a startup company that is in the market to fund the journey rather than starting from scratch ourselves. ”

Researchers say that for startups, this acquisition by a larger company can be a big boon for the organization. Startups typically lack the taxable income needed to benefit from tax credits, so being acquired can increase their growth and innovation capabilities through a larger cash injection.

Meanwhile, companies can diversify their R&D efforts by acquiring these high-performing startups, tapping into potential future innovations by leveraging outsourced teams as well as in-house teams for inventions. There is a possibility that it can be improved.

Researchers find that the reallocation effect of M&A activity due to R&D tax credits by established companies plays an important role in supporting start-ups with high capital needs but limited access to capital. It has said.