Tax incentives, business environment, and entrepreneurial and innovation outcome

Abstract

Using panel data from 294 cities in China (290 prefecture-level cities and 4 municipalities directly under the central government) from 2011 to 2020, this study investigates the impact of tax incentives on local innovation and entrepreneurship performance. Furthermore, it examines how the business climate and fiscal expenditure on science and technology (S&T) affect this process. Findings reveal that tax incentive programs significantly improve the effectiveness of innovation and entrepreneurship in cities, which is supported by robustness checks and endogeneity tests. Further mediation analysis indicates that tax incentives directly improve innovation and entrepreneurship performance and indirectly foster such activities by enhancing the business environment and augmenting fiscal allocations to S&T.