Can Government Innovation Subsidies Really Unlock Innovation? An Empirical Study of A-Share Listed Companies in China
Year: 2025
Type: article
Abstract: Enterprises, as the main body of innovation activities, undertake the important tasks of knowledge production and technology diffusion. However, due to the strong externality and uncertainty of R&D activities, enterprises are usually in a dilemma when faced with R&D task decisions, leading to problems such as low R&D willingness and low research output. To improve this situation, China usually adopts government innovation subsidies to alleviate the pressure of enterprises’ R&D funds in the hope of improving their willingness to conduct R&D and innovation output. However, the effectiveness of government innovation subsidies has been questioned by academics in recent years and has been subject to controversy. Critics argue that subsidies can lead to a “crowding out” effect on firms’ R&D investment, and that the “reverse” steering effect caused by information asymmetry can lead to “over-investment”. However, there are also advocates who believe that government subsidies are an important way to compensate for market failures in the innovation process and are important for increasing firms’ R&D output. Based on this, this paper focuses on the effect of government innovation subsidies on corporate R&D output and constructs a theoretical model that incorporates executive compensation incentives and corporate R&D intensity into the analytical framework. Based on the empirical data of A-share listed companies from 2008-2015, a parallel adjustment model is used to estimate and validate the proposed theoretical framework. The empirical results show that corporate R&D intensity hinders the promotion effect of government innovation subsidies on corporate innovation output, while executive compensation incentives enhance the promotion effect of government innovation subsidies on corporate innovation output, i.e., there is a “crowding-out effect” of corporate R&D investment on government innovation subsidies, while there is an “incentive effect” of executive compensation incentives on government innovation subsidies. In other words, there is a “crowding-out effect” of corporate R&D investment on government innovation subsidies, while there is an “incentive effect” of executive compensation incentives on government innovation subsidies. Accordingly, the policy recommendations of this paper are: first, government innovation subsidies can only be granted to enterprises with low R&D intensity to achieve better results; second, executive compensation incentives should be kept at a high level under high R&D intensity, otherwise government innovation subsidies will have negative effects on enterprises’ innovation output; third, appropriately increasing executive compensation incentives can help promote the transformation of government innovation subsidies.
Source: Transformative Society
Author: Qinru Ruby Ju
Institution: National University of Singapore
Language: English
Topic: Innovation Policy and R&D
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W6921397974