The latest research work of Associate Professor Yang Guochao and his co-author Prof. Rui Meng, The Incentive Effect and Catering Effect of Tax-reducing Policy for High-tech Enterprises has been published in the Chinese authoritative Economic Research Journal.
Whether the government should formulate industrial policies to stimulate R&D is a highly controversial topic. This paper takes advantage of the specific industry policy of China’s Regulation on the Identification of High-tech Enterprises as the empirical setting to study the economic consequences of industrial policy implementation to provide micro-level evidence for the dispute on industrial policy. Lowering the corporate income tax rate enables enterprises to better internalize the economic benefits of R&D, and providing certain subsidies reduces the marginal cost of R&D failures. To obtain preferential policies, enterprises may choose to release “false innovation signals”. Companies that obtained high-tech enterprise recognition by inflating their R&D investment showed less improvement in innovation investment as well as in the quantity and quality of innovation output. The false signals may deceive policy makers because the information screening by policy makers is costly. The study also found that authentic high-tech enterprises take advantage of the benefits of industry policy,such as tax cuts, government subsidies, and clustering of high-skilled labor to improve corporate innovation, while pseudo-high-tech enterprises rarely use preferential policies to engage in innovative activities.
The potential theoretical contributions of the paper's research are as follows: The two warring sides of the "industrial policy debate" have their respective positions. One school of thought believes that the market may fail and emphasizes the value of a “promising government”, while the other school thinks that the government may fail and supports the “invisible hand” theory. Dr Yang’s conclusion shows that industrial policy can have both positive and negative effects, because the relationship between the government and the market in the real world is complicated． Market dysfunction and government failure may co-exist． The “invisible hand” and “promising government” theories may work well together．Therefore, IIDPF proposes that future research should shift the focus of debate from whether the government should introduce industrial policy to how the government should implement industrial policy.
Secondly, there is no consensus on the findings of existing research on the effectiveness of industrial policy. In addition to the inherent complexity of industrial policy formulation and implementation, it is also closely related to the fact that studies have reached different conclusions based on different industrial policies, which has indirectly led scholars with different views to selectively accept empirical findings that meet their expectations. In contrast to existing research, this paper finds that different firms respond quite differently to the same industrial policy, thus demonstrating that industrial policy has both an encouraging and a catering effect. In other words, even the same industrial policy can have both positive and negative economic consequences. This finding helps to reconcile the different theoretical perspectives of the warring sides of the "industrial policy debate".
The paper's findings also have important policy implications. While the findings of this paper confirm the need for government industrial policy, it also reminds policy makers that they should take into account adverse selection by enterprises when determining the selection criteria to avoid the failure of policy objectives. More importantly, policy makers should consider increasing the cost of enterprises to take advantage of policy dividends by breaking the threshold of regulations, so that the cost of opportunistic behaviour of enterprises is much higher than the benefit, thus avoiding the implementation effect of industrial policy from deviating from the intended goal of industrial policy, and eventually promoting industrial policy to play its positive role more.