Direct subsidies or tax credits? The effects of different R&D policy tools

Governments increasingly recognise the benefits of direct subsidies and tax credits for supporting private sectors to adopt research and development (R&D) activities. However, the different reactions of firms toward these two types of measures have remained with advance financial support, whereas tax credits wait until the R&D expense has been incurred to pay back. Thus, the former is better at attenuating risk, but leaves recipients with less discretion in their research efforts. Firms with more financial resources can more easily overcome such constraints. Tax credits provide more flexibility to using the money. This can be especially beneficial for firms whose financial resources are limited. These ideas were tested using data on research support and research outcomes describing 2,748 Chinese firms in Beijing Zhongguancun Science Park between 2012 and 2015. Analyses of those data delivered support for the preceding arguments.