This paper explores the effect of fiscal incentives for R&D on innovation. Spain is considered one of the most generous countries in the OECD in fiscal treatment of R&D, yet our data reveal that tax incentives are little known and, especially, seldom used by firms. Restricting our empirical analysis to those firms that do report knowing about such incentives, we investigate the average effect of tax incentives on innovation, using both nonparametric methods (matching estimators) and parametric methods (Heckman’s two-step selection model with instrumental variables). First, we find that large firms, especially those that implement innovations, are more likely to use the tax incentives, while small and medium enterprises (SMEs) encounter some obstacles to using them. Secondly, the average effect of the policy is positive, but significant only in large firms. Our main conclusion is that tax incentives increase innovative activities by large and high-tech sector firms, but may be used only randomly by SME
