Strategy Changes as a Response to Alterations in Tax Policy

Abstract

This study examines how firms in the pharmaceutical industry responded to the R&D tax credit which was enacted in 1981. The change in research intensity (research/sales) subsequent to the tax change was estimated for the firms. An increase in research intensity was associated with the adoption of the tax credit. The strong response by the firms to the tax credit and the effort to maintain their relative position in research intensity indicate that research intensity is an important strategic dimension and driving force in the industry.