Do government subsidies stimulate firms' R&D efforts? Empirical evidence from China. Issue 2 (3rd May 2020)

• Record Type: Journal Article
• Authors: Sun, Xiaohua; Yu, Runqun; Wang, Yun; Colombage, Sisira R. N.
• Is Part Of: Asian journal of technology innovation. Volume 28:Issue 2(2020)
• Page Start: 163
• Page End: 180
• Publication Date: 2020-05-03
• Subjects: Government subsidies -- R&D decision -- Heckman two-step model -- state-owned firms; O31 -- O38; Technological innovations -- East Asia -- Periodicals; Technological innovations -- Southeast Asia -- Periodicals; Technological innovations -- Periodicals; Research, Industrial -- East Asia -- Periodicals; Research, Industrial -- Southeast Asia -- Periodicals; Research, Industrial -- Periodicals; 338.064095
• DOI: 10.1080/19761597.2020.1719018
• Languages: English
• ISSNs: 1976-1597

Abstract

ABSTRACT: Government subsidies have been one of the popular policy instruments to stimulate firms' R&D activities. We empirically investigate the impact of government subsidies on firms' R&D decisions of listed manufacturing firms in China. In contrast to prior studies, we split firms' R&D decision into two elements of 'whether to invest decision' and 'how much to invest decision'. The influences and mechanism of government subsidies on R&D decision are theoretically analysed to develop hypotheses tested in this study. We find that government subsidies have a promotion effect on both elements of the firms' R&D decision. Moreover, we also demonstrate the heterogeneous effects of government subsidies between state-owned and non-state firms. Due to the inherent principal-agent problem of state-owned firms and soft budget constraint, subsidies can only increase the probability to undertake R&D activities but cannot stimulate further investment in R&D efforts. However, our results indicate that government subsidies take effects in both elements of R&D decision for non-state firms.