Rains after the drought: the impact of VAT credit refund on corporate R&D expenditures in China

This study investigates the impact of a major tax policy reform – the Value Added Tax (VAT) credit refund policy – on corporate R&D expenditures in China. We employ a difference-in-differences approach to analyse the causal effect of the policy and examine potential heterogeneities based on firm features. Our findings reveal a significant and positive effect of the VAT credit refund policy on corporate R&D expenditures, particularly for firms with private ownership, small size, and non-high-tech classification. Additionally, mediation analysis indicates that the policy alleviates financial constraints, facilitating increased R&D investment, while moderation analysis shows a more pronounced impact on firms with lower initial liquidity. These results underscore the significance of addressing internal financial constraints and firm characteristics in designing tax policies to stimulate corporate R&D investment.