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Firm R&D, innovation and easing financial constraints in China: Does corporate tax reform matter?

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  • Howell, Anthony

Abstract

This paper studies the relationship between firms’ innovation activities, financial constraints and corporate tax reform in China. A firm-level proxy for financial constraints is derived using cash-flow analysis and subsequently linked to various innovation activities of the firm. As an identification strategy, difference-in-differences with exact matching is employed to study whether a reduction in the corporate tax burden via China's 2004 value-added tax (VAT) reform influences firms’ innovation activities given they face increasing financial constraints. The results reveal that low access to liquidity in the private sector has a persistent negative effect on firms’ innovation activities and reduces the innovation success for more R&D intensive firms. Given increasing financial constraints, a reduction in private-sector firms’ corporate tax burden spurs new product and process sales despite failing to affect either their decision to pursue R&D or the amount to invest. The findings suggest that easing financial constraints alone cannot correct the market failure caused by underinvestment in China's private sector.

Suggested Citation

  • Howell, Anthony, 2016. "Firm R&D, innovation and easing financial constraints in China: Does corporate tax reform matter?," Research Policy, Elsevier, vol. 45(10), pages 1996-2007.
    • Handle: RePEc:eee:respol:v:45:y:2016:i:10:p:1996-2007
    DOI: 10.1016/j.respol.2016.07.002
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    More about this item

    Keywords

    Financial constraints; Firm R&D; Innovation; Tax reform; China;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • 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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