Can the Super‐deduction of R&D Expenses Boost R&D Investment?

• Published date: 01 September 2023
• Author: Tao Qian,Yutao Zhan,Shiyuan Pan
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/cwe.12505

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 135–160, Vol. 31, No. 5, 2023 135

*Tao Qian, Associate Professor, China Academy of West Region Development, Zhejiang University, China.

Email: qiantaochew@zju.edu.cn; Yutao Zhan, PhD Candidate, School of Economics, Zhejiang University

and Research Center for Industries of the Future, Westlake University, China. Email: 11701021@zju.edu.cn;

Shiyuan Pan (corresponding author), Professor, School of Economics, Zhejiang University, China. Email:

shiyuanpan@zju.edu.cn.

Can the Super-deduction of R&D Expenses

Boost R&D Investment?

Tao Qian, Yutao Zhan, Shiyuan Pan*

Abstract

The super-deduction of research and development (R&D) expenses is at the core of the

policy to stimulate enterprise innovation in China. This paper identifi es whether fi rms

are supported by the super-deduction policies for R&D expenses and uses the diff erence-

in-diff erences method to investigate the impact of the policies on R&D investment. The

results show that changes in policy in 2013 signifi cantly increased the R&D investment

of firms engaging in key state-supported technologies. Policy changes in 2016

signifi cantly increased the R&D investment of fi rms engaging in non-key-state-supported

technologies. Enterprises not only invested all their tax incentives in R&D activities

but also increased their investment in self-raised funds. The super-deduction policy

had diff erent impacts on diff erent industries, fi rms with diff erent boards, and fi rms with

diff erent ownership. The policy signifi cantly aff ected the manufacturing and construction

industries, the Small and Medium Enterprise Board, and non-state-owned enterprises.

Through a mechanism analysis, we found that the policy significantly reduced the

user cost of R&D and increased the net cash fl ow of enterprises, which could raise a

fi rm’s R&D investment. It is necessary to increase policy support, expand the scope of

super-deductible expenses, and increase the super-deduction rate based on industry

classifi cation according to the sensitivity of diff erent industries to the policy.

Keywords: R&D investment, super-deduction policy for R&D expenses, tax incentives

JEL codes: H25, O31, O38

I. Introduction

In 2006, China introduced a series of preferential tax measures to encourage enterprises

to increase their investment in research and development (R&D), mainly through the

formation of a tax policy system with income tax incentives to stimulate enterprise

Tao Qian et al. / 135–160, Vol. 31, No. 5, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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innovation. The super-deduction policy for R&D expenses (hereafter referred to as the

super-deduction policy) is at the core of the system to stimulate enterprise innovation.

Thus, the study of the eff ect of China’s super-deduction policy on enterprise innovation

investment, based on the identifi cation of whether fi rms have benefi ted from the policy,

is of great importance.

It is diffi cult to identify whether an enterprise has technology supported by the policy

and benefi ts from it. From 2008 to 2015, the direct objects of China’s super-deduction

policy support were the technologies stipulated in the two government documents, the

High-tech Fields Supported by the State and the Guidelines for the Key Fields of High-

tech Industrialization with Current Priority Development.1 This study uses Web crawler

technology to obtain 15,835 annual reports of listed companies from 2014 to 2018 and

collects data on the deductions of R&D expenses by listed companies during this period.

We used the diff erence-in-diff erences (DID) method to investigate the impact of the

policy on listed companies’ R&D investments. In 2013, the policy expanded the scope of

deductible expenses to include “fi ve insurances and one housing fund” (basic endowment

insurance premiums, basic medical insurance premiums, unemployment insurance

premiums, work-related injury insurance premiums, maternity insurance premiums,

and the housing provident fund). The results show that the expansion of the scope of

deductible expenses in 2013 had a significant incentive effect on enterprises engaged

in key state-supported technologies, and the elasticity of their R&D expenditure to tax

incentives (hereafter referred to as elasticity) was 1.42. From the industry perspective,

the policy had a significant incentive effect on the manufacturing and construction

industries, with elasticities of 1.55 and 9.43, respectively. From the perspective of the life

cycles of enterprises, the policy had a signifi cant incentive eff ect on small- and medium-

sized enterprises (SMEs), with an elasticity of 1.75. From the perspective of ownership,

the policy had a signifi cant incentive eff ect on non-state-owned enterprises (non-SOEs)

with an elasticity of 1.35. In 2016, the policy was changed to expand technical fi elds and

signifi cantly increase the R&D investment of enterprises engaged in general technology

(technologies that are not key state-supported technologies), with an elasticity of 2.16.

Through a mechanism analysis, we found that the policy reduced the user cost of R&D

signifi cantly and increased the net cash fl ow of enterprises.

1High-tech Fields Supported by the State is an attachment to the Measures for the Recognition and

Administration of High-Tech Enterprises (No. 172 of 2008) issued by the Ministry of Science and Technology.

Guidelines for the Key Fields of High-tech Industrialization with Current Priority Development (No. 6 of

2007) was jointly compiled and issued by the National Development and Reform Commission, Ministry of

Science and Technology, Ministry of Industry and Information Technology, Ministry of Commerce, and the

State Intellectual Property Offi ce.