Timing Matters: Immediate vs. Deferred R&D Tax Credits and the Innovation Divide

Abstract

This study examines the impact of non-refundable R&D tax credits on firm innovation, focusing on how the timing of benefits – immediate versus deferred – affects R&D investment. Using a difference-in-differences-in-differences (DDD) design with administrative data from China, we find that immediate credits are over three times more effective at stimulating R&D than deferred credits, a gap amplified for liquidity-constrained firms. This result underscores that the timing of incentives can be more influential than the credit rate itself. Moreover, the policy acts regressively, as profitable firms receive immediate benefits while loss-making firms, typically younger and smaller, face deferred credits, widening the innovation divide. Methodologically, we develop a practical test and correction for “selection on gains” in difference-in-differences with treatment intensity, validating our design and providing a reusable tool for empirical corporate finance.