Local land supply and fiscal incentives for R&D: Evidence from a quasi-natural experiment in China

Whereas numerous studies have evaluated the effects of public research and development (R&D) support programs and R&D tax incentives on private R&D, little is known about local governments' fiscal incentives for R&D. In this study, we build a conceptual framework to clarify the critical role of local land supply in relation to fiscal expenditure on R&D. We treat the establishment of China's nine Land Supervision Bureaus in 2006 as a quasi-natural experiment, and run a difference-in-differences regression to identify causality. The results show that local governments allocate more fiscal expenditure to R&D in response to land-use supervision, which monitors illegal land granting behaviors, and this effect is stronger in cities where leaders have higher political career incentives and cities with greater fiscal decentralization. Moreover, we find that land-use supervision increases the probability and scale of firms' access to government subsidies for R&D; thus, enhancing regional innovation capacity. Our findings document that China's land resource is a curse for its innovation-driven growth as it impedes local governments' fiscal incentives for R&D.     

Going out to innovate more at home: Impacts of outward direct investments on Chinese firms' domestic innovation performance

This study explores the effects of cross-border mergers & acquisitions (CBMA) on domestic innovation of Chinese firms. We build a new panel dataset that matches information on CBMA and innovation activities for China's publicly listed firms. We rely on matching techniques combined with a difference-in-differences estimator to study the causal effects of CBMA respectively on firms' investments in innovation, innovation outputs, and financial performance. The main findings reveal that CBMA has both a positive impact on firms' R&D spending and number of patent applications, no statistically significant effect on the number of granted patents or on the quality of those patents, and a negative effect on firms' financial performance. These results depend, however, on the type of CBMA (horizontal or vertical), destination country (OECD or non-OECD), and the technological intensity (high-tech or not) of the acquirer and target firm. Overall, the findings bring into question whether CBMAs, and China's going-out strategy, will significantly boost its indigenous innovation capabilities.     

Firm-level innovation activity,employee turnover and HRM practices — Evidence from Chinese firms

This paper examines the relationship between employee turnover, HRM practices and innovation in Chinese firms in five high technology sectors. We estimate hurdle negative binomial models for count data on survey data allowing for analyses of the extensive as well as intensive margins of firms' innovation activities. Innovation is measured both by the number of ongoing projects and new commercialized products. The results show that higher R&D employee turnover is associated with a higher probability of being innovative, but decreases the intensity of innovation activities in innovating firms. Innovating firms are more likely to have adopted high performance HRM practices, and the impact of employee turnover varies with the number of HRM practices implemented by the firm.     

Do R&D tax incentives work? Firm-level evidence from China

Tax incentives have been used worldwide to encourage firm R&D, but there is little evidence on their effectiveness as a policy tool in developing countries. We use a panel dataset of Chinese listed companies covering 2007 to 2013 to assess the effects of tax incentives on firm R&D expenditures and analyze how institutional conditions shape these effects. Our results show that tax incentives motivate R&D expenditures for our sample firms. A 10% reduction in R&D user costs leads firms to increase R&D expenditures by 3.97% in the short run. We also find considerable effect heterogeneity: Tax incentives significantly stimulate R&D in private firms but have little influence on state-owned enterprises' R&D expenditures. Moreover, the effects of tax incentives are more pronounced for private firms without political connections. Hence, reducing political intervention complements tax incentives' capacity to foster firm R&D in developing countries.     

Union and Debt: Evidence from Chinese Private Firms

Do unions really matter in China? Using a dataset containing more than 110 thousand Chinese private manufacturing firms, this paper is the first attempt to examine how unions' bargaining power affects firms' capital structures. We find that: (1) the firms' debt levels are often positively associated with their unions' bargaining powers; (2) when a firm is in financial distress, the management is more likely to issue more debt to strengthen its bargaining power against the union and increase its residual income; (3) compared with long-term debt, short-term debt is a better option for the management to increase its bargaining power and residual income. Our research indicates that the unions of private Chinese firms are an important policy instrument for the management rather than useless decorations, which provides valuable insights for us to understand the employee–employer relations and firms' capital structures in emerging economies.     

Innovation and Corporate Tax Planning: The Distinct Effects of Patents and R&D*

Using a large US sample, we find a significant and positive relation between patents and corporate tax planning, and the effect is incremental to the effect of R&D on tax planning. We employ a quasi‐natural experiment based on staggered industry‐level innovation shocks to identify the positive causal effect of patents on corporate tax planning. We also find that patents are not associated with tax planning for domestic firms, but their association with tax planning is concentrated in multinational firms, which have the ability to shift domestic income to low‐tax countries. Moreover, we find that the identified effect mainly exists in the post–check‐the‐box (CTB) rule period when shifting income among affiliates becomes more flexible and convenient. Finally, we use two income‐shifting models and find that patents, rather than R&D, facilitate tax planning through an income‐shifting channel. Overall, our results suggest that R&D and patents facilitate firms' tax planning in distinct ways: R&D facilitates tax planning as intended through tax credits and deductions, whereas patents are used by taxpayers to avoid taxes aggressively through income shifting.     

Firm-level human capital and innovation: Evidence from China

This paper examines the role of human capital in firms' innovation. Based on a World Bank survey of manufacturing firms in China, we use two firm-level datasets: one from large metropolitan cities, and one from mid-sized cities. Patents are used as an indicator of innovation. The human capital indicators we use include the number of highly educated workers, the general manager's education and tenure, and the management team's education and age. We use the Negative Binomial and Instrumental Variables estimators to estimate patent production function models that are augmented by our human capital variables. We also use the zero-inflated Negative Binomial model to examine the likelihood of innovation. We find that the human capital indicators play an important role in influencing patenting, and that some of the human capital variables appear to have a greater impact on patenting in mid-sized cities. Our human capital estimates are obtained after controlling for firms' R&D, size, market share, age, and foreign ownership, as well as fixed effects to control for industry-specific characteristics, and firms' location and geography.     

Tax Incentives,On-the-job Training,and Human Capital Accumulation: Evidence from China

This study investigates the effects of an increase in the proportion of tax credit (IPTC) policy on firms' on-the-job-training expenses. We document that the IPTC significantly increases on-the-job training expenses; the result remains valid after a series of robustness tests. An analysis of heterogeneous effects shows that privately owned firms and small-scale firms are more susceptible to the IPTC's impacts than state-owned and large-scale firms. Finally, we find that the IPTC can improve the production efficiency of firms and promote firm performance and innovation.     

Does Tax Planning Affect Analysts' Forecast Accuracy?

We investigate whether firms' tax planning affects the accuracy of analysts' forecasts. Tax planning can exacerbate the complexity of firms' operations through strategic choices to exploit tax laws. Because of its effect on firms' operations, tax planning can influence analysts' efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor‐provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts' forecasts of both earnings per share and tax expense declines. We also document that firms with higher levels of APTS have greater year‐to‐year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding to engage in tax planning, firms appear to make trade‐offs between potential tax savings and negative effects on earnings properties and analysts' forecasts.     

Debt,R&D investment and technological progress: A panel study of Japanese manufacturing firms' behavior during the 1990s

Based on a panel data set of Japanese manufacturing firms in research-intensive industries, we investigate quantitatively the extent to which outstanding debt affected firms' R&D activities during the 1990s. We find that massive amounts of outstanding debt had a significant, negative effect on R&D investment during that time. We also find that R&D expenditures were closely linked to firm-level total factor productivity growth over the same period. In fact, a ten-percentage-point increase in the debt–asset ratio lowered the rate of firm-level total factor productivity growth by 0.26 percentage points between 1999 and 2001, because it reduced R&D activities. J. Japanese Int. Economies 21 (4) (2007) 403–423.     

Why Do Large Firms' Prices Anticipate Earnings Earlier than Small Firms' Prices?*

This paper presents evidence that the positive association between firm size and price leads of earnings is not solely a function of private search incentives for firm‐specific information. Specifically, we find that small‐firm prices also lag large‐firm prices with respect to industry‐wide information. Our empirical analysis extends Collins, Kothari, and Rayburn 1987 and Freeman 1987, who document that security‐price leads of earnings are positively associated with market capitalization. In particular, we examine the association between firm size and the timing of security returns for two components of annual earnings changes: the average change for a firm's industry and the firm's idiosyncratic change. We find that large firms' prices have a longer lead than small firms' prices with respect to both components. Large firms' early lead on industry‐wide earnings suggests that returns of large firms predict returns of same‐industry small firms. To test this implication, we construct a portfolio of long (short) positions in small firms when the prior month's returns of large firms in their industry are above (below) average for large firms in other industries. This zero investment portfolio earns 4.5 percent over 12 months.     

How does outward foreign direct investment enhance firm productivity? A heterogeneous empirical analysis from Chinese manufacturing

Using an original linked firm-level panel data from Chinese manufacturing firms over the period 2002–2007, this paper examines how outward foreign direct investment (OFDI) led productivity increase of parent firms (known as the own-firm effect) changes over firm heterogeneity. Conducting propensity score matching (PSM) techniques and differences-in-differences (DID) analysis, we find strong and robust evidence that the first OFDI promotes parent firm's productivity and this effect varies substantially with the firms' characteristics. In particular, firm's absorptive capacity is essential for the own-firm effect, and the absorptive capacity related with the product innovation is more important than that of the process innovation for the own-firm effect. Also, OFDI strategies for obtaining advanced technology and investing in developed countries significantly strengthen the own-firm effect, whereas, government supports have no significant impacts on the own-firm effect.     

Struggle for survival in credit crunch: The effect of interest rate deregulation in China

This study investigates how interest rate deregulation affects firms' financing choice between bank debt and public debt. Our analysis exploits China's 2013 bank interest rate floor deregulation as an exogenous shock to the supply of bank credit. Using a difference-in-difference design, we find that firms with higher default risk substitute away from bank loan and switch to public debt after the 2013 deregulation. However, this substitution to public debt is limited, leading to a dramatic decline in debt ratio. Our result also demonstrates that the effect on firms' public debt financing is more pronounced for firms with better information environments, suggesting that good information environment is an important prerequisite for making the switch. This switching, contradicting to traditional financing framework that high-risk firms prefer bank loans, inevitably is costly. Compared with low-risk firms, bonds issued by high-risk firms have significantly higher spreads, a higher likelihood of being secured, and a higher tendency of including an interest-adjusted clause. More importantly, we also document that high-risk firms subsequently improve their information transparency after the interest rate deregulation. Our findings highlight the role of interest rate deregulation in firms' financing choice and illustrate that firms incur high switching costs when their choice deviates from the optimal financing choice.     

Corporate key labs: Breakthrough or white elephant?

Based on manually collected data from Chinese listed firms' key laboratories at the state and provincial levels, this study shows that key laboratories improve firms' innovation output. Corporations with key laboratories at the state or provincial level produce more patents and citations than their counterparts. A series of endogenous treatment effects, including the Heckman two-step sample selection model, instrumental variable estimation, policy shock analysis, and propensity score matching, indicate that this study's main conclusion is robust and consistent. We also observe that key laboratories' beneficial impact on innovation output becomes more prominent for firms belonging to high-tech industries, those led by an inventor or scientist CEO, and those located in cities that enforce the protection of intellectual property. Further, key laboratories foster innovation mainly by developing scientific research capacity, increasing human capital, and improving R&D subsidies. Our findings demonstrate that key laboratories can benefit firms, their stakeholders, and the public in an emerging market such as China.     

Market competition,differences in technology,and productivity improvement: An empirical analysis based on Japanese manufacturing firm data

In this paper we examine empirically the effect of market competition on firm productivity improvements using data drawn from the Japanese manufacturing sector. We find that a non-linear relationship between competition and productivity growth induced by R&D activity as suggested by Aghion et al. (2005) holds for Japanese manufacturing firms. We also show that greater market competition widens technology differences across firms, and firms facing more intense competition are more productive than other firms. Our empirical results imply that productivity improvement through R&D activity depends on not only a competitive environment but also technological differences between firms.     

Relevance of Own R&D and Sources of Knowledge Transfer for Industrial Innovation in China

This study investigates industrial innovation and innovation patterns in China with a comparison to the Asian Newly Industrialized Economies (NIEs). It estimates knowledge production functions based on an original firm‐level dataset. Estimation results suggest that even though firms in China carry out various innovation activities at the same time, the innovation pattern found among their counterparts in the Asian NIEs is still relevant for contemporary China. In particular, sourcing knowledge and technologies from their OEM customers still plays a crucial role for Chinese firms' process innovation. In contrast, firms cannot rely on this knowledge source for realizing more sophisticated, knowledge‐intensive innovation outcomes, such as product innovation and patenting, for which their own R&D engagement is more significant.     

Does participating in the standards-setting process promote innovation? Evidence from China

This paper provides novel empirical evidence on the positive effect of standards-setting involvements on corporate innovation in China, reflecting in improving the patent quantity and patent quality. This kind of positive effect increases as the firm's top management team quality increases. We also show that the positive effect of standards-setting involvements is more evident for state-owned enterprises than non-state-owned enterprises due to the unique features of state-owned enterprises. Our results are robust to a battery of tests, including the use of alternative model specifications, firm fixed effects, the instrumental variable approach, potential omitted variables, and propensity score matching procedure. Further analysis reveals that standards-setting involvements foster innovation mainly through improving firms' R&D efficiency, reducing financial constraints, and inducing collaborative innovation. Overall, our findings suggest that standards-setting involvements matter for corporate innovation in China.     

The Influence of Firms' Emissions Management Strategy Disclosures on Investors' Valuation Judgments

Recent accounting research indicates that capital markets price firms' greenhouse gas (GHG) emissions and that disclosed emissions levels are negatively associated with firms' market values. The departure point for this study is to investigate whether investors value firms differently based on the strategies firms use to mitigate GHG emissions. These strategies include making operational changes, which reduces emissions attributable to the firm, and purchasing offsets, which reduces emissions unattributable to the firm. Using an experiment, we hold constant a firm's financial performance, investment in emissions mitigation, and net emissions, and find evidence that nonprofessional investors perceive the firm to be more valuable when it primarily uses an operational change strategy versus an offsets strategy. However, consistent with theory, this result only occurs when the firm's prior sustainability performance is below the industry average and not when it is above the industry average. This difference in firm value is consistent with the notion that nonprofessional investors believe information about a firm's emissions management strategy is material. Supplemental exploratory analyses reveal that our results are mediated by investors' perception that an operational change strategy is more socially and environmentally responsible than an offsets strategy for below industry average firms. Implications for our findings on theory and practice are discussed.     

R&D,financing constraints and export green-sophistication in China

This paper provides a theoretical and empirical analysis of the effects of R&D and financing constraints on the green-sophistication of Chinese firm exports. The theoretical model predicts that firms' R&D expenditure improves the level of green sophistication and financing constraints have moderating effects on firms' the export green-sophistication. The paper constructs an index of the export green-sophistication by incorporating green coefficient in traditional export sophistication. We use the data from the China industrial firm database and confirm our theoretical predictions. The financing constraints are found to have a significant moderating effects on the relationship between R&D and export green-sophistication in basic test and robustness check.     

Property rights security and firm survival: Micro-data evidence from China

The security of property rights has been found to play important roles in various aspects of firm behaviors. However, its effects on firm survival have been largely neglected in previous research. Using annual data of Chinese manufacturing firms over the period 1998–2008, we analyze the link between property rights security and firms' survival probabilities, differentiating firms into stated-owned enterprises (SOEs) and non-SOEs, and considering whether the linkage evolves over time. Examining a wide range of specifications, we find that the protection of property rights, by limiting government intervention and promulgating laws and rules, is crucial for firm survival. Moreover, better security of property rights benefits non-SOEs more. We also find that the beneficial effects of secure property rights on firm survival are more pronounced for years after 2003 when China speeded up deregulation to comply with its WTO commitments and reform target to establish a modern system of property rights than for years before 2002.