1. Introduction
Innovation is the first driving force leading sustainable economic development, and it is the key element in national competition. Therefore, innovation must be placed at the core of national development [
1]. Many countries such as Belgium, France, Germany, and America, use tax incentives, government subsidies, and other tax competition tools to stimulate enterprises to increase innovation activities and innovation efficiency [
2]. For one thing, as one of the most competitive emerging economies, it is worth considering whether China should also adopt tax competition to improve enterprise innovation efficiency and its mechanism. For another, industry is the most important industrial carrier of national technological innovation, and industrial enterprises are the leading force of national scientific and technological progress, which determines the important position of innovation efficiency in the whole country. Industrial enterprises engage in innovation activities to achieve a sustainable competitive advantage [
3]. However, innovation is a complex input–output process that requires a huge capital investment; it is not enough to improve innovation efficiency under the condition of limited innovation resources through market power. It is also necessary for the government to attract capital by means of tax competition such as tax preference. The local government adopts the means of tax competition to improve the return rate of capital to attract capital inflows into its jurisdiction and to provide available funds for enterprises to invest in innovation activities, thus affecting the innovation efficiency of enterprises. Therefore, it is worth studying the concrete effect and the possible mechanisms of tax competition.
Tax competition generally refers to the self-interested behavior of governments to reduce effective tax rates in their jurisdictions by means of implementing tax incentives in order to attract capital and other factors of production from other regions. Scholars have carried out a series of studies on tax competition, confirming that tax competition is widespread among countries [
4,
5,
6]. Zodrow and Mieszkowski (1986) and Wilson (1986) have established tax competition models, and they have shown that there exists tax competition between regions, which reduces tax rates and government public expenditure [
7,
8]. Janeba and Osterloh (2013) have used German data to establish a theoretical model of local tax competition to show that large jurisdictions (cities) compete locally with smaller neighboring communities and inter-regionally with distant cities, while small jurisdictions (the interior) only compete with other jurisdictions in neighboring areas [
9]. Chirinko and Wilson (2017) used panel data for the period 1965–2006 from the United States to estimate the capital tax reaction function, and they found that the slope of the reaction function was negative, that is, tax competition exists—it is not a bottom-by-bottom competition but a “sitting on the seesaw” [
10].
In order to comprehensively improve the innovation efficiency of enterprises and to accelerate industrial transformation and upgrading, local governments have adopted tax competition to support enterprises in improving innovation efficiency. However, whether the implementation of various means of tax competition can really promote the improvement of corporate innovation efficiency has aroused widespread attention and in-depth research in the academic community.
Some studies have found that the influence of tax competition on enterprise innovation efficiency is uncertain. For example, after combing the literature on the relationship between American tax preference policy and enterprise innovation efficiency, Mansfield (1982) found that the outcome was uncertain due to the limitation of measurement conditions and methods at that time [
11]. Some scholars hold positive opinions. For example, Czarnitzki et al., (2011) have shown that preferential tax policies can improve the innovation efficiency of manufacturing enterprises using Canadian data [
12]. Ehsan (2021) has found that the implementation of tax incentives and other tax competition measures for the R&D activities of small and medium-sized enterprises in the UK encouraged these enterprises to increase investment in innovation activities and to improve innovation efficiency [
13].Some scholars such as Catozzella and Vivarelli (2016) hold negative opinions, using data from Italy to study and to find that enterprises get preferential treatment through tax competition from the government but do not increase innovation efficiency correspondingly [
14]. Du and Mickiewicz (2016) conclude that the administrative approval of China’s tax preference policies is seriously subjective and arbitrary and lacks relevant constraints, leading to the loss of innovation efficiency caused by the rent-seeking of enterprises [
15].
To sum up, existing literature generally studies the impact of tax competition on overall enterprise innovation efficiency, but it does not consider the heterogeneity of enterprises, and the results also show that the effect of tax competition on enterprises innovation efficiency may be a promoter or hinderance. Therefore, as industrial enterprises are an important category of enterprises, whether tax competition has the same impact on the innovation efficiency of industrial enterprises as the overall enterprise is uncertain, and it needs further verification. Therefore, two competitive hypotheses are put forward:
H1a. Tax competition promotes the improvement of industrial enterprises’ innovation efficiency.
H1b. Tax competition hinders the improvement of industrial enterprises’ innovation efficiency.
The government adopts tax incentives and other tax competition methods for industrial enterprises, which has a signal transmission effect. It can send high-quality signals to the capital market and guide capital to flow to these enterprises. Chowdturya and Maung (2012) show that perfect capital markets reduce regional information asymmetry and the transaction costs of enterprises, and thus make capital flows more efficient and better improve the innovation efficiency of enterprises [
16]. Defects in the capital market aggravate enterprises’ situations of external financing constraints through strong information asymmetry between investors and enterprises on the quality of innovation projects. In this case, the lack of funds for enterprises to carry out some innovation projects has harmed innovation efficiency to a certain extent [
17].
According to the above literature review, it can be seen that tax competition influences the innovation efficiency of industrial enterprises by guiding capital flows. Therefore, the second research hypothesis of this paper is proposed:
H2. Capital flow plays a mediating role in the relationship between tax competition and innovation efficiency of industrial enterprises.
In summary, this paper studies the influence of tax competition and its mechanisms on the innovation efficiency of industrial enterprises using data for 31 provinces and regions of China from 2011–2018. The main conclusion is that excessive tax competition in China hinders the improvement of the innovation efficiency of industrial enterprises in which capital flow plays a partially mediating role. Further research shows that after the implementation of the innovation-driven development strategy, the degree of tax competition in China reduced, which alleviated the adverse impact of excessive tax competition on the innovation efficiency of industrial enterprises, and capital flow also reduced the negative impact.
This paper has the following contributions. First, the existing literature generally directly studies the relationship between tax competition and enterprise innovation, and it does not consider the influence mechanism; for example, Mukherjee et al., (2017) only find that there exists a negative relationship between state corporate tax rates and enterprise innovation, and they do not deeply explore the specific mechanism of this impact [
18]. Second, this paper notes that the degree of excessive tax competition decreased after the implementation of the innovation-driven development strategy, thus alleviating the degree of reduction in the innovation efficiency of industrial enterprises; the innovation-driven development strategy is implemented by the Chinese government and it has Chinese characteristics, but the economic effects of this strategy are also instructive to other countries. Third, most of the related studies focus on micro-econometric evidence, while this paper focuses on the macro level.
The rest of this paper is set up as follows: the first part is a literature review, and it puts forward the research hypotheses; the second part is the research design; the third part is the empirical process and the results discussion; and the last part is the conclusion and suggestions for further research.
4. Conclusions
This paper adopts the panel data of industrial enterprises in 31 regions in China to study the influence of tax competition on the innovation efficiency of industrial enterprises and its mechanism. The study concludes that current excessive tax competition in China has hindered the innovation efficiency of industrial enterprises and that capital flow plays a partial mediating role. Specifically, for every 1% increase in tax competition, the innovation efficiency of industrial enterprises decreases by approximately 13%, under the mediating effect of capital flow, it drops by approximately 12%. Further research shows that capital flow plays a suppression effect in the relationship between tax competition and the innovation efficiency of industrial enterprises between 2011 and 2014, when the innovation-driven development strategy had not been implemented, that is, capital flow expands the total effect between tax competition and the innovation efficiency of industrial enterprises. Specifically, for every 1% increase in tax competition, the innovation efficiency of industrial enterprises decreases by approximately 7%, but the suppression effect of capital flow causes it to drop approximately 21%. In the 2015–2018 period when the innovation-driven development strategy had been implemented, the degree of tax competition in China was reduced, alleviating the adverse impact of excessive tax competition on the innovation efficiency of industrial enterprises. Specifically, for each 1% increase in tax competition, the innovation efficiency of industrial enterprises decreases by approximately 12%, while the partial mediating effect of capital flow alleviates the declining degree of the innovation efficiency of industrial enterprises by approximately 10%.
The above results mean that tax competition should be moderate in the effect of encouraging enterprises to improve innovation efficiency. The above results also show that the implementation of an innovation-driven development strategy reduces excessive tax competition, changes the effect of capital flow from suppression to a partial mediating role, alleviates the adverse impact of excessive tax competition on the innovation efficiency of industrial enterprises, and reflects the good effect of China’s innovation-driven development strategy.
In summary, innovation activities of enterprises require a large amount of capital investment, with long cycles, uncertain returns, and a good external innovation environment. Therefore, tax competition not only needs a perfect capital market to alleviate financing constraints, it also needs the government to take measures to guide the rational allocation of resources in the capital market to promote the innovation efficiency of industrial enterprises. According to results of this paper, excessive government intervention is not conducive to the efficient allocation of market resources, so it is necessary to have a combination of promising government and effective markets to jointly promote the improvement of the innovation efficiency of industrial enterprises [
26].
In view of the contributions provided by this article, it can be improved and expanded from the following aspects in the future. The first concerns the research period of this paper: since 2011, the book of CHINA STATISTICAL YEARBOOK ON SCIENCE AND TECHNOLOGY has adjusted the statistical scope of industrial enterprises, and the data for 2019 and beyond have not yet been released. Therefore, the sample scope of this article is selected from 2011 to 2018. In the future, we will continue to pay attention to the update of data and conduct further research. The second point is that future research can compare China with other countries to find more meaningful conclusions.