| It has long been argued that the firm’s expenditures on innovation activities are sub-optimality as a consequence of market failures. Government, using policy tools, such as R&D grants, tries to solve this problem. The main purpose of these public interventions is to reduce the effective cost of R&D, induce the firms’investment in research and improve the efficiency of innovation activities. The relationship between government support, private investment and the innovation performance has been extensively debated within the economic literature, but previous studies in the area are mainly limited in Western developed markets with relatively stable institutional environments. Although many economists and policy-makers have pointed out that the firms behaviors and performance would be different as the coexistence of the market mechanism and the redistributive mechanism in transition economies, yet little is known about the effectiveness of public R&D grants and private funding in enhancing firms’ innovation performance in transition economics that are experiencing significant institutional changes in moving from central planning to market competition. This narrow focus limits theoretical completeness and is a significant gap in the literature. Base on this background, we, using the data from high-tech industry, from the whole industry, different size, different sectors and the co-evolution perspective to examine the relationship of government grants, private funding and innovation performance in China, a major economic force in transition.The China State Council prioritized the high-tech industry in1995, and thus offered special policies and financial aid to boost its development. Statistics shows that the R&D funding of China’s high-tech firms has grown rapidly from1996. The annual government grants increased with an average annual growth of40%, and the private R&D spending leaped with an average annual growth of65%. In particular, in proportional terms, government R&D investment and private funding for the high-tech industry in China have been conspicuous compared with other countries. But despite experts’ predictions of a promising future for the high-tech industry, controversy surrounded the government’s development drive. This can be summarized into two questions:whether public supports crowd out private funding, and whether government grants and private funding significantly affect innovation efficiency. Against this background, this paper uses the stochastic frontier production function to examine the relationship between government support and private investment and the innovation performance of the high-tech industry, particularly in terms of the effectiveness and efficiency of government R&D grants and private R&D funding. Furthermore, because firm size is important in the assessment of firm performance, so we divide the samples into two groups (large-and medium-sized firms) to probe the different impacts of government grants and private funding on innovation efficiency in forms of different sizes.In order to deeper discuss the relationship of the three subjects, this paper further to subdivide the high-tech industry into five sub-sectors, which are Manufacture of Medicines, Manufacture of Aircraft and Spacecrafts and Related Equipment, Manufacture of Electronic and Communication Equipment, Manufacture of Computers and Office Equipment, Manufacture of Medical Equipments and Measuring Instrument, to discuss the relationship of government grants, private funding and innovation efficiency in China.Based on the above analyzes, we find the role of government funding is different when the size and the sector are difference. Therefore, different sectors in the High-tech industry need different methods to help them grow up combining their characteristics. Due to the limited space and limited to the author’s research ability, this paper is not discuss all the five high technology sectors, but just using the Aircraft and Spacecrafts Manufacturing (ASM) as the research object to analysis our topic. So this article constructs the matrix analysis model of technology policy and technology strategy, puts forward four technological innovation types of ASM, and sums up the development process of aviation and aerospace industries, respectively. Then based on the S&T activities data of Chinese ASM, we apply empirical model to analyze the relationship of Technology policy, enterprise strategy and innovation performance. As the most affected by policy intervention in high technology industry, ASM has the most closely associated with the government policy. Therefore, it would have well representative using the ASM to discuss the relationship of government R&D funding, enterprise R&D input and innovation efficiency.Based on the analysis, this paper has drawn the following conclusions:1. For the whole high-tech industry.(1) Our study suggests that government grants do not crowd out private funding, but public support significantly stimulate the private expenditures of firms.(2) Grants negatively impact the innovation efficiency of high-tech firms. Private funding, in the absence of government grants, does not positively impact the innovation efficiency of the Chinese high-tech industry. But in combination with government support, private funding positively affects innovation performance.(3) Labor force, physical capital and firm size are important to innovation performance level in the high-tech industrial sector.2. From the enterprises’size perspective.(1) Government grants do not crowd out private funding in the Chinese high-tech industry, whether for large-sized firms or medium-sized firms, but public support significantly stimulate the private expenditures of firms.(2) China’s private R&D funding significantly influences the innovation performance of large-and medium-sized high-tech firms. But unlike the result for the whole high-tech industry and large-sized high-tech firms, the coefficient of government grants is not significant and is very small. This result suggests that government grants may not negatively impact innovation of medium-sized high-tech firms. Private R&D positively impacts medium-sized firms’innovation, and although government grants have little direct effect on high-tech firm innovation performance, they indirectly affect firm innovation efficiency, as they condition the impact of internal factors such as private funding on performance. And unlike for large-sized firms, financial performance and firm size positively affect the innovation efficiency of medium-sized high-tech firms.3. In terms of divisions. First, the government R&D funding has the significant positive influence on the innovation performance of pharmaceutical manufacturing and aviation aircraft manufacturing. But it is not significant for the other three sectors. Second, the enterprise R&D input has a significant role in promoting sectors’ innovation efficiency besides medicine manufacturing industry. Third, R&D capital stock, enterprise scale and business performance are significantly positive influence on innovation efficiency for all the five sectors. And R&D staff full-time equivalent is positive impact on the Manufacture of Medicines, Manufacture of Electronic and Communication Equipment, Manufacture of Computers and Office Equipment, Manufacture of Medical Equipments and Measuring Instrument, but has significant negative impact on ASM.4. For the ASM. We find firstly government grants support, the enterprise R&D investment and the innovation performance in China’s ASM all showed a rising trends in the past60years despite some fluctuations. Secondly, the study reveals that the government technology policy and enterprise strategy have significant positive effects on innovation performance in ASM. In addition, the combination of mission policy and market strategy has become the dominant factor affecting China’s ASM development. In other words in addition to the building of technology leadership following the mission-oriented policy, the Chinese government and enterprises also tend to foster a high rate of market services which are dependent on the market-oriented policy. Thirdly, the empirical results show that domestic technical progress is the main catalyst for the improvement of the ASM technical ability and the innovation performance. And the enterprise which is committed to innovative can get more government grants and policy support in a transition country like China.
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