Do tax policies drive innovation by SMEs in China?

Runhua Wang and Jay P. Kesan

Journal of Small Business Management, 2022, vol. 60, issue 2, 309-346

Abstract: There is little empirical evidence showing how innovation by small and medium enterprises (SMEs) is impacted by tax policies, especially SMEs from developing countries. We study the economic rationales for Research and Development (R&D) tax incentives and explore how targeted policies of corporate tax credits (firm-specific) and value-added tax credits (product-specific) in China impact the domestic SMEs’ R&D investment and R&D output. The “finance gap” theory can explain the R&D increase by SMEs induced by corporate tax credits but cannot explain the effectiveness or the ineffectiveness of value-added tax credits on R&D incentives. We find a stringent corporate tax policy with narrowly tailored R&D thresholds for tax credits can positively incentivize R&D and patent applications by SMEs. We also find that a value-added tax policy without any R&D thresholds is overinclusive in terms of its impact on the subsidized SMEs’ innovation. Value-added tax credits cannot induce R&D when they do not confer subsidies or a competitive advantage on SMEs. However, we find that the value-added tax policy creates a spillover effect on R&D by SMEs in other technology sectors who may choose to qualify for these value-added tax credits.

Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/00472778.2019.1709381 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ujbmxx:v:60:y:2022:i:2:p:309-346

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ujbm20

DOI: 10.1080/00472778.2019.1709381

Access Statistics for this article

Journal of Small Business Management is currently edited by Eric Liguori

More articles in Journal of Small Business Management from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().