Unintended effects of tax incentives on firms' strategic patenting

This paper investigates the unintended effects of a tax incentive program on firms' strategic patenting behavior in China. The program reduces the corporation income tax rate for firms certified as high- and new-technology enterprises. Firms must meet patent requirements to be eligible for the program. We employ an event-study design to examine firms' patenting behavior around certification events. Results show that firms strategically increase utility model patent applications in the pre-certification year but do not increase invention and design patents. The strategic increase in utility model patent applications is to meet the patent requirements, but strategic patenting is neither associated with a real increase in R&D activities nor represents substantive innovation outputs. The strategic patenting behavior is more evident for less innovative firms, private firms, non-first-time certification users, and firms in non-priority industries. Our study highlights the importance of understanding firms' behavioral responses for the evaluation and design of tax incentive programs.