The impact of R&D subsidies and tax incentives on firm innovation: complements or substitutes? --- Firm-level evidence from China

Abstract

This paper tries to account for impact from both R&D tax incentives and subsidies policies on firm innovation in China. Unlike most of the literature, we look at the joint effect of the two R&D policies when they are awarded to firms simultaneously rather than separately, measuring firm innovation by input and output proxies, namely “R&D investment” and “number of patents application”. We use a firm-level survey data from Shanghai, China, and combine the propensity score matching method and the difference in difference method to effectively eliminate the selection bias problem. The results suggest that significant additionality effect exists when single policy implemented. However, the two policies act as substitutes even firms differed with amount of grant, firm size and financial status. In addition, heterogeneity analyses show how these effects differ across different category of firms. Empirical results provide reasonable implications for policy makers.