Reducing Uncertainty and Enabling Digital Transformation in Emerging Economies

This study examines how institutional design in R&D tax incentives influences firms’ digital transformation. Exploiting a quasi-natural experiment created by China’s pre-assessment reform of the R&D tax deduction, we employ a progressive difference-in-differences design using panel data on Chinese A-share listed firms from 2009 to 2023. We find that the introduction of the pre-assessment mechanism significantly accelerates firms’ digital transformation. Mechanism analyses show that the reform operates primarily by reducing policy-related uncertainty and operational risk, thereby encouraging firms to undertake digital innovation and generate more digital-related patents. Cross-sectional tests further reveal that the effect is stronger for firms with greater managerial attention to innovation, higher risk-taking capacity, and those operating in regions with less developed digital infrastructure. Our findings contribute to the literature on tax incentives and corporate innovation by highlighting the role of institutional mechanisms—beyond direct fiscal subsidies—in shaping firms’ strategic responses to R&D tax policy. More broadly, the study provides causal evidence on how reducing policy uncertainty can facilitate firms’ digital transformation, offering important implications for the design of innovation-oriented tax policies in emerging economies.