LAUSR

Abstract Scholars currently have a limited understanding of the role of R&D tax credit in developing countries. To help fill this gap, this article examines the allocation logic and innovative consequences of R&D tax credit in China. Using a panel data set of listed companies in China from 2010 to 2012, we show that the local institutional contexts, such as government transparency, market development, and industrial policies, promote the allocation of R&D tax credit. The fiscal capacity of local governments constrains the implementation of tax credit policy. Furthermore, this article estimates the causal effect of R&D tax credit on firm innovation. We find that R&D tax credit significantly increases firms' innovative input and output. The results are consistent and robust using various specifications. Yet the stimulation effect is heterogeneous across industries and scale. R&D tax credit only evidently promotes innovation in manufacturing firms and large firms.