Do social policies foster innovation? Evidence from India's CSR regulation

We examine the effect of social policies on corporate innovation using India's mandatory Corporate Social Responsibility (CSR) regulation. This regulation mandates firms with pre-tax profits above a certain threshold tospend 2 % of the profits on CSR. We demonstrate a significant bunching of companies just below the profitthreshold post-regulation compared to the pre-regulation period. Firms close to the profit threshold manipulatetheir earnings to avoid compliance by increasing their R&D expenses. We show that, on average, firms thatincrease R&D expenses to avoid the regulation apply for one more patent and announce two new products. Theincrease in R&D expenses and patenting is concentrated in firms with a prior history of innovation. Our resultssuggest that social policies can generate indirect incentives for innovation