Fact of the Week: After China Implemented an Investment Tax Credit, Productivity Grew 3.7 Percent

September 5, 2017

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Strong business investments in fixed assets such as robots and other advanced technologies are key to driving productivity growth. To incentivize such investments, governments employ a number of policy tools. Investment tax credits are an example of this. They allow companies to deduct expenditures on fixed assets—so when their investments go up, their taxes go down.

China implemented such a policy in 2009 in the wake of the Great Recession—and it achieved the intended result. Economists Yongzheng Liu and Jie Mao analyzed data from a half million firms from 2005 to 2012 and found that implementing the credit increased business investment by 8.8 percent and productivity by 3.7 percent.