R&D tax incentive policy, intellectual property right protection, and corporate innovation in an emerging market

Using the implementation of a pretax additional deduction (PAD) policy as a natural experiment, we document that the real effect of the PAD policy depends on regional intellectual property rights (IPR) protection. In regions with strong IPR protection, PAD policy enhances corporate innovation outputs and firms' innovation intention, while in regions with weak IPR protection, the role of PAD policy is greatly moderated. However, firms still enjoy the policy's tax benefits through real activity manipulation. Overall, we suggest that the value of the R&D PAD policy is mitigated in emerging markets lacking strong IPR protection. To promote innovation, governments should not only implement stimulus policies but also prioritize the development of robust IPR protection.