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Does tax reduction spur innovation? Firm-level evidence from China

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  • Zheng, Wenping
  • Zhang, Jie

Abstract

The role of taxation in firms’ innovation is far from a clear answer. We estimate the effect of tax reduction on firms’ innovation. By using a novel matched dataset with rich information on innovative activities and taxation reduction, we find the significant promotion effect of tax reduction In addition, by taking heterogeneity into account, we find the promotion effect is larger in service industry than manufacturing sector. Furthermore, we employ alternative innovation indicators and estimation models to take robust checks. The policy implication is that more tax reduction policies should be introduced to small and medium- size firms.

Suggested Citation

  • Zheng, Wenping & Zhang, Jie, 2021. "Does tax reduction spur innovation? Firm-level evidence from China," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319313315
    DOI: 10.1016/j.frl.2020.101575
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    References listed on IDEAS

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    Citations

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    Cited by:

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    3. Zhou, Fuzhao, 2023. "Succession planning and firm innovation," Finance Research Letters, Elsevier, vol. 58(PA).
    4. Shadrack Muthami Mwatu, 2022. "Institutions and export performance: firm level evidence from Kenya," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 69(4), pages 487-506, December.
    5. Yang, Tingting & Xu, Botong, 2023. "Incentive effects of government subsidy on technological innovation: Evidence from pharmaceutical industry," Finance Research Letters, Elsevier, vol. 55(PA).
    6. Zhong, Yuanguang & Yang, Tong & Zillmann, Stefan & Cao, Bin, 2022. "The role of government regulatory policies in financing capital-constrained retailers under competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 157(C).
    7. Tosun, Onur Kemal & Lucey, Brian, 2023. "Growth … What growth?," Finance Research Letters, Elsevier, vol. 52(C).
    8. Daleng Xin & Yanzhen Yi & Lanjun Shen, 2025. "Do Tax Incentives Promote Corporate Green Investment?—Evidence from a Quasi-Natural Experiment Based on China’s Corporate Income Tax Reform," Sustainability, MDPI, vol. 17(3), pages 1-25, January.
    9. Lin, Xiaowei & Zhang, Qihao & Chen, Aihua & Zhang, Pengdong, 2022. "The Bright Side of Financial Constraint on Corporate Innovation: Evidence from the Chinese Bond Market," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Tax reduction; Innovation; Endogeneity;
    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

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