Do tax policies drive innovation by SMEs in China?
研究中国企业所得税抵免和增值税抵免对中小企业研发投入和产出的影响，发现严格的企业所得税政策能激励研发和专利申请，而增值税政策则存在过度覆盖和溢出效应。
There is little empirical evidence showing how innovation by small and medium enterprises (SMEs) is impacted by tax policies, especially SMEs from developing countries. We study the economic rationales for Research and Development (R&D) tax incentives and explore how targeted policies of corporate tax credits (firm-specific) and value-added tax credits (product-specific) in China impact the domestic SMEs’ R&D investment and R&D output. The “finance gap” theory can explain the R&D increase by SMEs induced by corporate tax credits but cannot explain the effectiveness or the ineffectiveness of value-added tax credits on R&D incentives. We find a stringent corporate tax policy with narrowly tailored R&D thresholds for tax credits can positively incentivize R&D and patent applications by SMEs. We also find that a value-added tax policy without any R&D thresholds is overinclusive in terms of its impact on the subsidized SMEs’ innovation. Value-added tax credits cannot induce R&D when they do not confer subsidies or a competitive advantage on SMEs. However, we find that the value-added tax policy creates a spillover effect on R&D by SMEs in other technology sectors who may choose to qualify for these value-added tax credits.