Do R&D tax incentives work? Firm-level evidence from China

• Published in: China economic review 2017-12, Vol.46, p.50-66
• Main Authors: Jia, Junxue, Ma, Guangrong
• Format: Article
• Language: English
• Subjects: Firm R&D; Political connection; State ownership; Tax incentive
• ISSN: 1043-951X; 1873-7781
• DOI: 10.1016/j.chieco.2017.08.012

Tax incentives have been used worldwide to encourage firm R&D, but there is little evidence on their effectiveness as a policy tool in developing countries. We use a panel dataset of Chinese listed companies covering 2007 to 2013 to assess the effects of tax incentives on firm R&D expenditures and analyze how institutional conditions shape these effects. Our results show that tax incentives motivate R&D expenditures for our sample firms. A 10% reduction in R&D user costs leads firms to increase R&D expenditures by 3.97% in the short run. We also find considerable effect heterogeneity: Tax incentives significantly stimulate R&D in private firms but have little influence on state-owned enterprises' R&D expenditures. Moreover, the effects of tax incentives are more pronounced for private firms without political connections. Hence, reducing political intervention complements tax incentives' capacity to foster firm R&D in developing countries. •We use a dataset of Chinese firms to assess the effects of tax incentives on R&D expenditures.•We find that tax incentives motivate R&D expenditures for our sample firms.•Tax incentives significantly stimulate R&D of private firms but not SOEs.•The effects of tax incentives are more pronounced for private firms without political connections.