Firms' investment on Research and Development(R&D) is paid attention as one of the important policy agenda since effect of a firm's R&D investment diffuses not only the industry that the firm belongs to, but also the whole economy of a country. However, due to the characteristics of public goods of R&D, private firms are undertaking R&D investment by their own financial resources which is less than the optimal social level. In order to achieve the optimal level of R&D investment, government policy should aim at bringing private incentives in lines with the social rate of return. Korean government has been practicing both R&D subsidy programs and tax credits on R&D as the methods of government intervention and has changed several tax treatments on R&D for the benefit of private firms in 2008 Tax Changes.

The purpose of this report is to analyze and evaluate 2008 Tax Changes on R&D tax credit. Especially, we explore the effects of reintroducing exclusion in gross revenue of reserve fund on R&D investment and increasing tax credit rate on R&D investment through reviewing the literature. The main findings are threefold.

Firstly, the literature showed that the effects of exclusion in gross revenue of reserve fund on R&D investment appears differently between large and small and medium-sized enterprises(SMEs). One reason out of several of them is SMEs seem not to be able to invest large amount of money on R&D like the large enterprises. However, the large enterprises defer tax on corporate income by setting up the fund as much as they can. In addition to these, the reintroduction of that system might make existing tax credit policy on R&D more complicated and less efficient. This does not seem to come along with the purpose of 2008 Tax Changes of stimulating firms' R&D investment.

Secondly, by early 2000, it is found in most of the literature that intensified tax treatment on R&D caused private firms to increase their investment on R&D. They also concluded that the larger the firms sizes are, the more benefit they get from tax treatment on R&D. The literatures point out that most of SMEs do not make the most of the tax treatment beneficiary on R&D since they invest paltry amount of money on R&D. Then, they make profit without utilizing the tax treatment on R&D. In sum, the effectiveness of tax credits should be examined before tax changes.

Thirdly, R&D tax credits is practiced through both rolling-average-base and volume-base in Korea. According to research results of alien countries, volume-based credit induces more new R&D investment in long-run but is less efficient compare to the other design of R&D tax credits. Rolling-average-based tax credit makes a firm's revenue cost lower, but induces less new R&D investment. There has been no research about the effectiveness analysis of an R&D tax credit design on Korean enterprises. Therefore, it is needed to conduct a research designing an R&D tax credit to be more effective using Korean enterprises' data.