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The (dis)connection between R&D and productivity in China: Policy implications of R&D tax credits

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  • Liu, Qing
  • Qiu, Larry D.
  • Wei, Xing
  • Zhan, Chaoqun

Abstract

We use Chinese firm-level data from 2001 to 2007 to estimate the (dis)connection between firms’ R&D and productivity and find that the productivity effect of R&D investment is very low. We conjecture that firms conduct/report unproductive R&D in order to obtain policy benefits. To explore this plausible misconduct, we investigate the effects of China's 2003 R&D tax reform on firms’ R&D investment. The reform generates exogenous treatment variations across firm ownerships for causal identification. We find that the reform has statistically significant and positive effects on firms’ R&D investments. Quantitatively, the reform raises firms’ R&D investments by 6.68 % and the estimated R&D elasticity of tax deduction for private firms is 0.9147, which is comparable to other countries. However, our further empirical results indicate that the policy-induced R&D is less efficient in promoting firms’ productivity than the spontaneous R&D. We provide evidence of firms’ relabeling non-R&D expenses to R&D expenses, which partly explains the inefficiency of R&D investment.

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  • Liu, Qing & Qiu, Larry D. & Wei, Xing & Zhan, Chaoqun, 2024. "The (dis)connection between R&D and productivity in China: Policy implications of R&D tax credits," Journal of Comparative Economics, Elsevier, vol. 52(1), pages 297-320.
  • Handle: RePEc:eee:jcecon:v:52:y:2024:i:1:p:297-320
    DOI: 10.1016/j.jce.2023.11.004
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    More about this item

    Keywords

    R&D; Productivity; Innovation policy; Firm ownership;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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