The impact of government subsidies on the persistence of firm innovation: evidence from China

ABSTRACT

How the government subsidies will change the performance of firm’s innovative projects has long been debated. We attempt to narrow this gap from a dynamic perspective by employing Chinese A-share listed firms as a sample. Based on the novel innovation index, we studied the impact of government subsidies on the persistence of firm innovation. Findings show that total government subsidies promote the persistence of overall firm innovation. However, when we divided the total government subsidies into technological subsidies and non-technological subsidies, we found that technological subsidies cast an inhibitory effect on the persistence of self-sustaining firm innovation. In further analysis, we discover that ‘self-sustaining firm innovation investment replacement’ phenomenon can explain the crowding-out effect of technological subsidies on self-sustaining firm innovation persistence. Based on empirical evidence, we also observed that the substitution of private innovation investment by technological subsidies may result in management costs. These findings offer a theoretical foundation for further enhancing the effectiveness of government subsidy policies.

KEYWORDS:

• Government subsidies
• firm innovation persistence
• technological subsidies
• self-sustaining firm innovation
• China

JEL CLASSIFICATION:

• C33
• R11
• R58
• O38
• O47

Acknowledgements

We thank anonymous referees, the Editor, for helpful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2023.2295304.

Notes

¹ This approach is well-established in the field of economics and finance, as evidenced by numerous studies, such as those by Ronchetti and Huber (2009) and Hadi and Simonoff (1993).

² For example, if Firm i received more than the median amount of technological subsidies for its industry and year, hitechsub is assigned a value of 1. Otherwise, hitechsub is assigned a value of 0.

Additional information

Funding

This work was supported by the Guangdong science and technology plan project: Research on sustainability measurement of corporate R&D investment and innovation of post fiscal subsidy policy in Guangdong Province under Grant [number 2019A101002050]; the General Project of Philosophy and Social Science Planning of Guangdong Province, China [number GD19CYJ16].