ABSTRACT Using firm‐level data from China's National Tax Survey Database for the period 2007–2016, combined with prefecture‐level macroeconomic indicators, this study examines the distortionary effects of tax revenue targets on corporate innovation from a dual perspective of substantive versus strategic innovation. The results indicate that tax tasks significantly suppress substantive innovation while simultaneously encouraging strategic innovation. This distortion effect is more pronounced among small‐scale firms, non‐high‐tech enterprises, and firms located in regions characterized by low entrepreneurial activity, as well as in nonprovincial capital and nonmunicipality cities. Mechanism analyses reveal that tax revenue targets affect firms' innovation choices primarily through two channels: the tightening of financing constraints and the inducement of R&D manipulation. Furthermore, the “vertical overweighting” of tax targets across administrative hierarchies exacerbates these distortionary effects. In contrast, the soft‐budget‐constraint nature of tax target setting and intergovernmental competition “for innovation” partially mitigate the adverse consequences.
Ji et al. (Sun,) studied this question.