Do capital investment incentives promote regional economic growth? Evidence from accelerated depreciation policy in China

Government capital investment incentives are vital tools for reducing capital costs and stimulating business investment. While previous studies have examined the effects of capital investment incentives on firm-level behavior, their impact on regional economic growth remains underexplored. This paper investigates the regional growth effects of capital investment incentives by exploiting the China’s Accelerated Depreciation Policy for Fixed Assets. Using county-level data from 2011 to 2018, we find that the accelerated depreciation policy significantly boosts local economic growth, with robust results surviving rigorous endogeneity tests. The growth-enhancing effects of the policy operate through two key channels: (1) a tax-shield mechanism that improves corporate liquidity by increasing depreciation allowances and reducing tax burdens, and (2) an investment channel that spurs capital expenditure on production equipment, thereby enhancing firm output. Our findings contribute to the literature on how tax policies shape regional economic growth.