The (dis)connection between R&D and productivity in China: Policy implications of R&D tax credits

•Estimate the (dis)connection between firms’ R&D and productivity in China during 2001–2007.•Find that the productivity effect of R&D investment is very low.•Study is based on China's 2003 R&D tax reform on firms’ R&D investment.•The reform raises firms’ R&D investments by 6.68 % and the estimated R&D elasticity of tax deduction for private firms is 0.9147.•We provide evidence of firms’ relabeling non-R&D expenses to R&D expenses, which partly explains the inefficiency of R&D investment.