Capital incentives in the age of intangibles

Cloud computing presents a significant change in the way firms access digital technology and enables data-driven business models. Now, firms can acquire their storage, processing and software needs as a cloud computing service rather than making upfront fixed cost investments in capital. Yet, policies that encourage digital diffusion are still targeted towards investment in physical IT capital. This paper exploits a UK tax incentive for capital investment to examine firm adoption of cloud computing and big data analytics. Using a quasi-natural experimental approach our empirical results show that the policy increased investment in IT capital and hardware as one would expect; but it reduced the adoption of cloud and big data analytics. The adverse effects of the policy on cloud and big data adoption are particularly pronounced for small firms.