Abstract
This paper studies the relationship between firms’ innovation activities, financial constraints and corporate tax reform in China. A firm-level proxy for financial constraints is derived using cash-flow analysis and subsequently linked to various innovation activities of the firm. As an identification strategy, difference-in-differences with exact matching is employed to study whether a reduction in the corporate tax burden via China's 2004 value-added tax (VAT) reform influences firms’ innovation activities given they face increasing financial constraints. The results reveal that low access to liquidity in the private sector has a persistent negative effect on firms’ innovation activities and reduces the innovation success for more R&D intensive firms. Given increasing financial constraints, a reduction in private-sector firms’ corporate tax burden spurs new product and process sales despite failing to affect either their decision to pursue R&D or the amount to invest. The findings suggest that easing financial constraints alone cannot correct the market failure caused by underinvestment in China's private sector.
Original language | English (US) |
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Pages (from-to) | 1996-2007 |
Number of pages | 12 |
Journal | Research Policy |
Volume | 45 |
Issue number | 10 |
DOIs | |
State | Published - Dec 1 2016 |
Externally published | Yes |
Keywords
- China
- Financial constraints
- Firm R&D
- Innovation
- Tax reform
ASJC Scopus subject areas
- Strategy and Management
- Management Science and Operations Research
- Management of Technology and Innovation