As American manufacturers struggle against Chinese imports, new research reveals that state tax breaks for research and development have become an unexpected savior for U.S. companies. A study by researchers Johan Hombert of HEC Paris and Adrien Matray of UC Berkeley shows that these tax incentives have helped American firms stay competitive in an increasingly challenging market.
The findings come at a time when states are racing to keep their manufacturing bases strong. By the late 2010s, more than two-thirds of U.S. states were offering tax breaks to companies that invest in research and development, with some states being even more generous than the federal government. This created a unique opportunity for researchers to study how R&D spending helps companies weather competition from China.
“Different states introduced these tax breaks at different times and with different levels of generosity,” explains Adrien Matray of UC Berkeley. “This allowed us to see exactly how R&D investment helps companies deal with foreign competition.”
The timing of the study is particularly relevant. Since China joined the World Trade Organization in 2001, U.S. manufacturers have faced unprecedented pressure. The research found that when Chinese imports surge in an industry, the average American manufacturer sees their sales growth drop by nearly two percentage points. However, companies that invest heavily in R&D tell a very different story.
“Companies that spend more on R&D, encouraged by these tax breaks, see only half the negative impact from Chinese competition,” notes Matray. “This shows up clearly in their hiring and investment decisions.“
The effect on jobs is particularly noteworthy. When faced with increased Chinese competition, companies that spend little on R&D tend to cut their workforce. In contrast, those who invest heavily in R&D manage to keep their employment levels relatively stable. The same pattern appears in physical capital investment – companies that do lots of R&D continue to invest in their operations despite competitive pressures.
State policymakers are taking notice, as these findings suggest that R&D tax breaks aren’t just about promoting innovation for its own sake. They’re proving to be crucial for keeping manufacturing jobs and investment in our states when faced with foreign competition.
However, the study also points out some problems with current policies. While R&D tax breaks help companies that can maintain their research spending, many firms cut their R&D budgets first when times get tough. This suggests that the timing of these tax breaks might need rethinking.
“Companies often need R&D investment most when they’re struggling the most,” Matray notes. “This suggests we might need policies that specifically help firms keep up their R&D spending during tough competitive periods.”
The research shows that R&D investment helps companies mainly by allowing them to make products that stand out from the competition. Companies that invest more in R&D are better at making distinct products that can compete with Chinese imports on quality rather than price.
For state policymakers, this provides new evidence that R&D tax breaks do more than just encourage innovation – they help local manufacturers adapt and survive in the face of tough foreign competition.
Yet questions remain about how best to design these policies. While the research shows clear benefits for individual companies, the bigger economic picture is still unclear. “We need to think carefully about whether these policies are helping our companies compete better internationally, or just shifting business from one American firm to another,” Matray cautions.
As states compete to attract and keep manufacturing jobs, these findings suggest that R&D tax breaks might be more than just another economic development tool – they might be essential for keeping American manufacturing competitive in today’s global market.
The study underscores the crucial role that R&D tax credits play in helping U.S. manufacturers withstand foreign competition, particularly from China. By incentivizing innovation, these policies not only support individual firms in maintaining sales, investment, and employment levels but also strengthen the broader manufacturing sector. However, the findings also highlight the need for a more strategic approach to R&D incentives—one that ensures companies can sustain research investments even during economic downturns. As global competition intensifies, fostering long-term innovation through well-designed tax policies may be one of the most effective ways to safeguard the future of American manufacturing.
The study underscores the crucial role that R&D tax credits play in helping U.S. manufacturers withstand foreign competition, particularly from China. By incentivizing innovation, these policies not only support individual firms in maintaining sales, investment, and employment levels but also strengthen the broader manufacturing sector. However, the findings also highlight the need for a more strategic approach to R&D incentives—one that ensures companies can sustain research investments even during economic downturns.
Looking ahead, policymakers must consider how to fine-tune these tax incentives to maximize their impact. Encouraging R&D investment is not just about immediate job retention or boosting company profits; it’s about securing the long-term competitiveness of American manufacturing. This means designing policies that offer stability for firms, ensuring that R&D efforts continue even in periods of economic uncertainty. If done right, these incentives can serve as a powerful engine for innovation, growth, and resilience—helping American manufacturers not only survive but thrive in an increasingly complex global economy.
