SD Policy, Political Connection and R & D Expense: Firm-Level Evidence from China

Abstract

This paper aims to answer whether super deduction of R & D expense policy (SD policy), a preferential tax policy, effectively stimulates a firm’s R & D in the first place and whether the policy is affected by the firm’s political connections in the second. By theoretically exploring how SD policy and political connection influence a firm’s R & D expense behaviour, the paper then empirically examines the effects using firm-level data in China. Results show that SD policy stimulates firms’ R & D significantly, which was, however, mitigated by political connections. Besides, the types of political connections of a firm’s CEO have heterogeneous effects on the SD policy-R & D expense nexus in the way that CEOs with CPC and NPC backgrounds have a promotive effect but are statistically insignificant. In contrast, CEOs with government and CPPCC backgrounds have an inhibitive effect.