Do tax policies drive innovation by SMEs in China?

Runhua Wang, Jay P. Kesan

Research output: Contribution to journalArticlepeer-review


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.

Original languageEnglish (US)
Pages (from-to)309-346
Number of pages38
JournalJournal of Small Business Management
Issue number2
StatePublished - 2022


  • Small and medium enterprises
  • corporate tax credits
  • patent applications
  • research and development investment
  • value-added tax credits

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation


Dive into the research topics of 'Do tax policies drive innovation by SMEs in China?'. Together they form a unique fingerprint.

Cite this