Studies On The Effect Of Industry Cycle On Firm’s Innovation

The phenomenon that firm’s R&D investment changes countercyclically over economic cycle is worth exploring.This paper uses a Chinese firm-level panel data set containing 12 336 A-share listed firms and manufacturing industry climax index over the period 2007-2020,by means of H-P filter.Viewing on financial constraints,to identify the cyclicality of firm’s innovation at an industry’s level.Then we analyze the moderating effect of financial constraints and tax incencive policy on the cyclicality of firms’ innovation over the industry business cycle.Our main results can be summarized as follows:(i)R&D spend ratio is countercyclical without financial constraints;(ii)but it becomes less countercyclical as firms face tighter financial constraint;(iii)while tax incentive policy can strengthen the countercyclity of R&D investment over industry’s business cycle by restraining the financial constraints but it fails to mitigate the constraints at a higher degree;(iv)furtherly,we found that the tax policy in China is procyclical over industry’s business cycle for the fact that firm’s effective tax rate decreases slightly proportionally during the downturns of industry’s business cycle.In particular,our main conclusions from heterogeneity analysis can be listed as follows:(i)Firm’s R&D investment is more countercyclical in non-state-owned enterprises and new and high-tech industries;(ii)the constraints of financing on countercyclicality of firm’s R&D is less significant in state-owned enterprises and non new and high-tech industries;(iii)the restraining effect of tax incentive policy on financial constraints is more obvious in new and high-tech industries.Thus,our empirical study on the background of Chinese context provides new evidence for enterprises to adjust innovation behaviors according to industry business cycle,as well as references for alleviating firm’s financial dilemma and stimulating firm’s innovation:(i)reduce financing barriers and discrimination and broaden financing channels for firms;(ii)strengthen taxation support and reduce effective tax rate;(iii)strengthen long-term budget balance and adjustment for economic fluctuations;(iv)improve the accuracy of innovation incentive policies and adopt differentiated support measures.