2.1. R&D Tax Credit in China
With the gradual acceleration of economic globalization, emerging economies have entered a stage of rapid development. The international status of emerging economies has also changed significantly. In particular, China as the representative of emerging economies has attracted much more attention. By 2021, China’s R&D spending reached CNY 2.79 trillion, accounting for 2.44% of its GDP, ranking 12th in the world. In order to stimulate the enthusiasm of enterprises for innovation, China introduced a technological innovation policy with tax incentives and financial subsidies as the core. Among them, the R&D tax credit is one of the measures with great intervention strength in China, and has gradually become an important part of innovation incentive policies [
8,
9]. The scheme, exclusively offered by the Ministry of Finance and the Ministry of Taxation, allows firms to deduct a given percentage of their R&D expenditures from their corporate tax liability. Since the implementation of the R&D tax credit in 1996, the scope of application, the contents of R&D expenses, and the deduction rate of R&D activities have undergone many reforms.
Specific reform measures are as follows: Firstly, the scope of application is expanding. In 1996, it was limited “state-owned enterprises and collective industrial firms”; with China’s reform and opening up and the increase in foreign-invested enterprises, by 2003, it was non-discriminatorily available to “all industrial enterprises of various ownership with sound financial accounting systems, auditing and levying corporate income tax.” In 2006, it was expanded to include “resident enterprises that meet accounting standards, conduct audits and accurately collect R&D expenses.” In 2015, it adopted a “negative list” method to determine the scope of the policy, which stipulates that except for seven industries, such as tobacco manufacturing, accommodation and catering, real estate, wholesale and retail, etc., can apply for preferential policies as long as they meet the regulations. This means that the scope was further expanded and the threshold was further lowered for enterprises to receiving tax incentives.
Secondly, the contents of R&D expenses are more detailed than before. Before 2008, it was vague. In 2008, only expenses related to R&D activities in the specified list could be eligible for deduction. In 2015, the contents were further expanded; specifically, labor costs for external employees, insurance premiums for high-tech R&D, travel expenses directly related to R&D, and conference expenses were included in the contents of R&D expenses. This is conducive to the specific operation of accounting personnel and tax collection personnel and the implementation of policies.
Thirdly, the deduction rate has been increasing. In 1996, 50% of the actual amount of “technology development fees” was deducted from taxable income. In 2017, the rate of technology-based small and medium-sized firms was increased to 75%. In 2018, the rate for all firms except those specified in the negative list was increased to 75%. In 2021, the rate of manufacturing firms was increased from 75% to 100%, and that of non-manufacturing enterprises was increased to 75%. The adjustment increased the ratio of R&D tax credit of technology-oriented SMEs to 100%. The multiple changes in the policy have undoubtedly demonstrated to the public the government’s strong support for firm innovation.
2.2. Literature Review
With the prevalence of tax incentives, more attention has been paid to the debate on whether or not R&D tax credits stimulate innovation. Most of the studies consider that R&D tax credits increase firms’ investment in R&D by reducing the R&D cost of firms, increasing the cash flow of firms, and stimulates the innovation vitality of firms. For instance, Rao (2016) considered that the R&D tax credit has a positive impact on the R&D expenditure of US firms [
13]. Czarnitzki et al., (2011) empirically showed that tax credits promote the number of new products, sales revenue of new products, and original innovation of Canada [
5]. Ivus et al., (2021) noted that tax credits programs stimulate the number of patent applications of Indian firms [
14]. Zhang and Guan (2018) found that tax incentives have a positive impact on enterprise innovation performance based on the data of enterprises in Beijing Zhongguancun Science and Technology Park [
15]. Li et al., (2019) found that the additional deduction for R&D expenses significantly promoted firm R&D investment by using the data of Chinese listed firms [
8]. Jin et al., (2022) showed that the additional deduction of R&D expenses increased enterprise innovation input and innovation output [
16]. However, some scholars also have different views. For instance, Labeaga et al., (2021) considered that Spanish manufacturing firms using tax credits regularly are likely to aim at innovating, while an occasional tax credits firm user may aim at reducing the tax burden, not innovating [
17]. Dai and Chapman (2022) noted that tax stimulates R&D investment and patent growth, but greater incentives may induce R&D crowding out [
18]. Laplante et al., (2019) noted the existence of the phenomenon of “strategic R&D classification”, that is, firms use the inherent ambiguity in tax reports to classify indirect costs as R&D expenditures to achieve the purpose of obtaining R&D tax credits, resulting in low tax incentive effects [
19]. Chen et al., (2020) showed that R&D tax credits have no significant impact on the quality of Chinese firm technological innovation [
20].
Existing studies generally suggest that R&D tax credits have an incentive effect on enterprise innovation investment, new product sales revenue, and patent number, but few literatures distinguish radical and incremental innovation. The distinction between radical and incremental innovation helps policymakers better position policy objectives [
21,
22]. For instance, Beck et al., (2016) empirically tested the heterogeneous impact of public R&D subsidies on radical and incremental innovation against the background of Swiss fund policies. The results show that public R&D spending only has a significant effect on radical innovation [
23]. Cappelen et al., (2012) based on the research background of SkatteFUNN, found that tax credits have a positive impact on the development of new production processes, but have a limited impact on new products and patents [
12]. Damsgaard et al., (2017) showed that government subsidies increase enterprises’ R&D investment, but do not affect enterprises’ choice of radical or incremental innovation projects [
24]. In contrast, tax incentives make enterprises more inclined to choose incremental innovation projects.
In addition, a general limitation of the existing literature on R&D tax credits is that most studies are under the framework of homogeneity. Until recently, studies have focused on the impact of heterogeneity on innovation; some papers focus on the heterogeneity factors at the macro level, such as examining the different impact of tax policies on enterprise innovation in different economies. Freitas et al., (2017) used the samples of Norway, Italy, and France and found that the impact of tax incentives on the innovation output of enterprises in their respective countries is very different [
25]. Some literatures focus on the heterogeneity of industries and suggest that the different effects of policy incentives are due to the differences in market competition degree, technological opportunities, and the strength of knowledge diffusion and spillover effect. Paff (2004) investigated the impact of standard tax credits and alternative incremental credit (AIC) in the US, highlighting substantial differences between the high-tech and low-tech sectors, which is also supported by research by Paff (2005) and Rao (2016) [
13,
26,
27]. Yang et al., (2012) considered that R&D tax credits have a stronger promotion effect on firms in the electronic industry than in other industries in Taiwan [
10]. Castellacci and Lie (2015) considered that R&D tax credits have a strong incentive effect on enterprises in service industry and low-technology industry [
28]. However, very few studies focus on heterogeneity factors at the firm level. Castellacci and lie (2015) found that the effect of R&D tax credits on small and medium-sized firms is different from that of large enterprises [
28]. He et al., (2020) conducted an investigation on Chinese enterprises and found that R&D tax credits have a stronger incentive effect on the innovative output of non-state-owned firms and large-scale firms [
29].
Through the review of the above literature, we found that the existing literature has the following limitations: First, the difference between radical and incremental innovation is not considered enough in previous the literature, and most of the studies focus on developed countries, with little evidence offered for developing countries. Second, most of studies have been conducted at the macro level across countries or industries, with little research on different types of enterprises. The systematic heterogeneity framework is not formed, and the corresponding theoretical mechanism is also lacking. In addition, from the innovation-driven perspective, R&D tax credits enable enterprises to gain benefits from innovation, while complementary resources or innovation capacity are also key factors [
30]. It is necessary to consider complementary resources and innovation capability as heterogeneity factors in the research on the impact of R&D tax credits. As a consequence, we examined the heterogeneous effects of R&D tax credits on radical and incremental innovation in China. Furthermore, under the heterogeneous framework of complementary assets and innovation capability of firms, we empirically examined the impact of R&D tax credits on the innovation of different types of firms from the perspective of property rights, firm scale, and firm age.