Tax incentive, R&D investment and firm innovation: Evidence from China

Binbin Tian, Baixue Yu, Shi Chen and Jingjing Ye

Journal of Asian Economics, 2020, vol. 71, issue C

Abstract: We estimate the effect of R&D tax incentives on firm-level R&D expenditures (RDE) and patenting using a change in the eligibility criteria for a super deduction in China. In 2006, the Chinese government relaxed the “10 % eligibility criterion”, which stated that only firms with a 10 % or higher increase in prior-year RDE can claim an additional 50 % tax deduction. We use an event study approach to show that firms that became newly eligible to claim the super deduction (those just below the criterion) catches up on RDE and product innovation measured by the sales of new products. In the long run, we also observe a closing gap in the number of patents between the two groups of firms. Moreover, extending tax benefits to all firm helps to lower the tax burden, and we find no evidence of manipulation and relabeling.

Keywords: Tax incentive; R&D investment; Firm innovation; China (search for similar items in EconPapers)
JEL-codes: G38 H25 H32 O31 O38 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:71:y:2020:i:c:s1049007820301251

DOI: 10.1016/j.asieco.2020.101245

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