Xiaoyong Dai

Purpose: This paper investigates whether China's R&D tax deduction policy triggers firms to manipulate their R&D expenditures upward.Design/methodology/approach: This paper employs the ratio of actual tax savings as a proxy for the benefits of the R&D tax deduction policy based on manually collected and systematically cross-checked data. The relationship between tax benefits and abnormal R&D spending is estimated in a sample of Chinese A-share listed companies for the period 2007–2018.Findings: The findings suggest that tax deductions lead to positive abnormal R&D spending and that this deviation in R&D spending may be attributed to firms' upward R&D manipulation for tax avoidance. The results also indicate that this behavior is more significant for the period after the policy revision, in non-HNTEs (high and new technology enterprises), and in firms with a high ratio of R&D expenses.Research limitations/implications: It is difficult to establish a sophisticated and unified model to identify the specific strategy of upward R&D manipulation that firms use to obtain tax benefits.Practical implications: Managers should take into account upward R&D manipulation when designing governance mechanisms. Policymakers in developing countries may further pursue preferential tax policies that cover every stage of innovation activities gradually; the local provincial governments need to leverage their proximity and flexibility advantages to develop a tax collection and administration system.Originality/value: This study contributes to the understanding of the complex effect of R&D tax incentives and helps more fully illuminate firms' upward R&D manipulation behavior from the perspective of tax planning strategies, which are underexplored in previous research.

This paper investigates the behavioral additionality effects of a unique high‐ and new‐ technology enterprise (HNTE) program in China. The program provides a reduced corporate income tax to certificated HNTEs. By distinguishing research expenses from development costs, we examine if the tax incentive program affects firms’ composition of R&D investment, based on a sample of Chinese listed firms. The results indicate that the tax incentive program encourages firms to focus more on development than on research. The effects are also found to be heterogeneous among the first‐time, repeated, and one‐time certification users. The results imply that tax incentives prompt firms to invest in short‐term development opportunities with promising private returns. Conversely, they are less likely to stimulate risky research projects with potential high rates of social and long‐term economic returns. Our study highlights the importance of understanding the behavioral additionality effects for innovation policy evaluations and better policy designs.

The explosion of research and development (R&D) expenditures in China brings a puzzling fact that the proportion of research in R&D is extremely small, and thus the proportion of development is large. This article distinguishes research from development in R&D and investigates the heterogeneous effects of the two components on the performance of Chinese listed firms. Using a generalized propensity score matching approach with continuous treatments, we present non-linear relationships between R&D composition and firm performance. While development-oriented firms benefit more from an increase in profit than a growth in productivity, orientation toward research contributes more to productivity gains than to profitability. Research and development activities are found to be complementary in promoting firm performance. The results suggest the existence of optimal proportions of the components of R&D for maximizing firm performance.