This dissertation focuses on the effects of fiscal policy on investment in industrial innovation. We particularly evaluate the impact of tax incentives on R&D expenditures After discussing the desirability of government intervention in the innovation activities, we set up a model of demand for R&D investment derived from a dynamic profit maximization framework following Jorgenson investment theory. The effects of tax incentives on R&D expenditures is indirectly captured through the user cost of research capital The estimation of the R&D investment function is conducted at the firm, industry, and at selected manufacturing sector level. Results indicate that R&D investment is responding to price changes, therefore, tax incentives through their effects on the user cost of research capital should be effective in stimulating R&D expenditures However, although the estimates indicate that demand for R&D investment is price elastic, the additional R&D expenditures generated by theses tax incentives fell short of revenues losses to the government. There are evidences for many firms, especially those in the low-tech sector, that these R&D incentives programs provided windfall profits rather than an incentive to expand their R&D programs