Title: Direct subsidies or tax credits? The effects of different R&D policy tools

Authors: Zhenzhen Xie; Luqun Xie; Jiatao Li

Addresses: Department of Innovation, Entrepreneurship and Strategy, School of Economics and Management, Tsinghua University, 30 Shuangqing Road, Haidian District, Beijing, China ' Department of Information, Technology and Innovation, Antai College of Economics and Management, Shanghai Jiaotong University, 1954 Huashan Road, Xuhui District, Shanghai, China ' Department of Management, School of Business and Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

Abstract: Governments increasingly recognise the benefits of direct subsidies and tax credits for supporting private sectors to adopt research and development (R&D) activities. However, the different reactions of firms toward these two types of measures have remained with advance financial support, whereas tax credits wait until the R&D expense has been incurred to pay back. Thus, the former is better at attenuating risk, but leaves recipients with less discretion in their research efforts. Firms with more financial resources can more easily overcome such constraints. Tax credits provide more flexibility to using the money. This can be especially beneficial for firms whose financial resources are limited. These ideas were tested using data on research support and research outcomes describing 2,748 Chinese firms in Beijing Zhongguancun Science Park between 2012 and 2015. Analyses of those data delivered support for the preceding arguments.

Keywords: subsidies; tax credits; policy effectiveness; innovation performance; China.

DOI: 10.1504/IJTM.2021.115759

International Journal of Technology Management, 2021 Vol.86 No.1, pp.25 - 43

Accepted: 17 Nov 2020
Published online: 09 Jun 2021 *

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