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Tax incentives and enterprise innovation path selection: evidence from China's R&D expense super deduction reform

Author

Listed:
  • Xiang, Junyi
  • Zhuo, Deming
  • Zhou, Yihan
  • Jia, Yundi
  • Zhao, Weichen

Abstract

This study uses China's 2016 R&D expense super deduction reform as a quasi-natural experiment to explore the impact of tax incentives on enterprises' innovation path selection. The findings reveal that tax incentives significantly promote incremental innovation while having no significant effect on breakthrough innovation. Mechanism analysis indicates that this phenomenon is driven by the intensification of managerial myopia and financing constraints, which push firms to favor low-risk, short-cycle incremental innovation. Heterogeneity analysis further shows that the promoting effect of tax incentives on incremental innovation is more pronounced in firms with low cash holdings, non-high-tech firms, and those that became eligible for the policy after the reform. This study implies that although tax policies can stimulate innovation, their design needs optimization to guide enterprises towards breakthrough innovation and enhance overall innovation quality.

Suggested Citation

  • Xiang, Junyi & Zhuo, Deming & Zhou, Yihan & Jia, Yundi & Zhao, Weichen, 2025. "Tax incentives and enterprise innovation path selection: evidence from China's R&D expense super deduction reform," Finance Research Letters, Elsevier, vol. 85(PE).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pe:s1544612325015752
    DOI: 10.1016/j.frl.2025.108321
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    References listed on IDEAS

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