Does a green-designed fiscal policy optimal firm innovation scheme on volatility? A firm level evidence in the Post-Covid-19 era

Abstract

Volatility in natural resource commodity prices due to the Covid-19 pandemic has increased production costs and restricted output, imposing a risk for economic growth. In order to promote a green economic recovery, it is imperative that financial and fiscal policy reforms are designed to motivate innovation and growth. Through evaluating the impact of the low energy-consumption tax reduction policy, this paper investigates the motivation and mechanisms of innovation as a recovery strategy. Using the quarterly data of Chinese listed firms during 2019Q1 to 2021Q2, we use Difference-in-Difference as our estimation strategy, and discover several findings. First, innovation is the strategy used for recovery and to gain market power, and the low energy-consumption tax reduction policy can significantly facilitate firms' innovation activities. Second, our findings further show that the low energy-consumption tax reduction policy improves firms' innovation investment through alleviating firms’ financial constraints. Finally, the financial cost and internal liquidity are improved through financing innovation activities. According to the results of this research, we can conclude the main policy implication that an effective green-designed fiscal policy can be part of an optimal firm innovation scheme for recovery in the post-Covid-19 era.