Performance feedback and strategic R&D classification: a further study of R&D tax credit

ABSTRACT

Tax incentives are an important measure in most industrial countries to support firms R&D. However, R&D tax credit leads firms to engage in strategic R&D classification that classifies indirect costs as eligible R&D inputs in order to reduce tax liability. Based on the behavioural theory of the firm, we investigate the impact of performance feedback on firm’s strategic R&D classification. The results show that when performance falls below aspirations, the pressure to achieve aspirations forces firms to reduce strategic R&D classification; when performance is above aspirations, in order to reduce tax liabilities, firms are more willing to engage in strategic R&D classification due to the lack of performance pressure. Our study helps to understand horizontal differences in R&D investment in the context of tax incentives.

KEYWORDS:

• Tax credits
• strategic R&D classification
• aspirations
• performance feedback

JEL CLASSIFICATION:

• E62
• G38
• H32

Acknowledgments

We are grateful for the support of Chongqing Social Sciences Planning Project of China (2021BS084).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work is supported by Chongqing Social Sciences Planning Project of China [2021BS084].