Do Government R&D Subsidies Promote Firm Performance?

There is a common market failure problem in the innovation activities of enterprises.Scholars have carried out numerous studies from the perspective of market support and financial support to answer the question on how to solve the innovation market failure problem.Among them,the focal point of investigations revolves around the theme that governments should promote corporate innovation through financial grants.However,using the data of different countries or governments’ R&D subsidy policies,there is still no consistent conclusion about the effect of subsidies on corporate innovative growth.Since the reform and opening up,China’s innovation system has experienced gradual transformation from the innovation system centered by public scientific research institutions to the innovation system addressed by enterprises.During this period,a variety of government R&D subsidy policies have emerged endlessly,which have left a great impact on Chinese innovative development.It has become a major practical problem to systematically sort out and discover various R&D subsidies implemented by Chinese government in recent years and their effects.The purpose of this study is to sort out and summarize the government R&D subsidies obtained by Chinese listed companies and further investigate the innovative performance of various subsidy policies.On the basis of the conclusions drawn from Chinese government R&D subsidy policies and existing literature,this study discovers following gaps for further study.First,the existing research mainly focuses on the relationship between subsidies and innovation input or output,while the relationship between subsidies and enterprise performance needs to be further explored.Second,the existing research focuses on the relationship between R&D subsidies and innovation input or output,however,the relationship between different types of subsidy policies and firm performance needs to be further investigated.Third,the relationship between government support and market support in the implementation of R&D subsidy policy is also an important research issue,which calls for further exploration.The rich innovation policy practice of the Chinese government can provide a unique database for further study of the abovementioned issues.Therefore,from the perspective of R&D subsidy policy stages of government granted enterprises,this study creatively divides the government R&D subsidies obtained by enterprises into three types:ex-anti,in-process,and ex-post R&D subsidies.Generally,this study first constructs a comparative static theoretical model to discover the relationship between R&D subsidies and firm performance,and finds the cost burden,signal financing and innovation plus mechanism of R&D subsidies on firm performance.Among them,the cost burden mechanism indicates that the cost of applying for R&D subsidies is not conducive to the incentive effect of subsidies and ultimately reduces firm performance;the signal financing mechanism reveals that government R&D subsidies improve the attention of capital market to an exact firm and then improves its financing convenience,which is likely and finally to expand its investment scale and increase its performance;the innovation plus mechanism shows that government R&D subsidies promote R&D input and expand innovation output of enterprises,which are likely to enhance their performance.Next,in the empirical part,this study mainly studies the impact of R&D subsidies on enterprises.Specifically,by using Chinese A-share listed company data from 2008 to 2019,this study selects R&D project subsidies,selective tax incentives,and government innovation awards as typical representatives of ex-anti,in process,and expost types of R&D subsidies respectively,and empirically explores the relationship between three types of R&D subsidies and firm performance.Among them,due to the limitation of the index availability,this study only verifies the signal financing and innovation plus mechanisms.Through empirical analysis,this study submits following conclusions.First,R&D project subsidy policy can promote firm performance and its incentive effect is mainly realized through signal financing and innovation plus mechanisms.R&D project subsidies are the most important,the most widely used,the largest amount and the widest coverage among all types government R&D subsidies.By manually sorting out the data of government innovation subsidies obtained from government,this study selects this kind of ex-anti R&D subsidy data and empirically analyzes the relationship between them and enterprise performance.This study finds that R&D project subsidies significantly improve enterprise performance.By using a series of robustness tests and endogenous tests like PSM method,Heckman two-step method and instrumental variable method,the above conclusion is still robust.In addition,the incentive effect of R&D project subsidies on firm performance shows obvious nonlinear characteristics i.e.,only in a "moderate range" it can play the best role of enhancing firm performance.By using the mediation effect models,this study verifies the existence of signal financing and innovation plus mechanisms and that R&D project subsidies promote firm performance.Second,selective tax incentive policy can also promote firm performance through signal financing and innovation plus mechanisms and it also has significant governance effect.Selective tax incentive is not only a policy with Chinese characteristics aiming to play the role of government subsidy by using tax incentive,but also an important in process type R&D subsidy policy.This study takes the selective tax incentive policy as a typical representative of in process type R&D subsidy policy and empirically investigates its effect on firm performance.Through the similar benchmark models,robustness analysis,endogenous test methods,and the mediation effect models described above,this study finds that selective tax incentives significantly promote firm performance and there also exist signal financing and innovation plus mechanisms.Considering that the selective tax incentive policy is a kind of financial support method with Chinese characteristics to encourage firm innovation,there is scant literature to explore its functional effect,therefore,this study further explores the relationship between it and corporate innovation.Further analysis shows that selective tax incentives promote the substantial technological innovation of enterprises,and the relationship between selective tax incentives and firm innovation is likely to be positively affected by executive salary incentives,but not executive equity incentives.Third,government innovation award policy can also promote firm performance through signal financing and innovation plus mechanisms.Government innovation award is an important supplementary incentive policy among huge R&D subsidy policies in China.It is even regarded as an alternative policy when the intellectual property system fails.However,for a long time,there have been a few empirical studies on the effect of go vernment innovation awards.In recent years,the Chinese government has implemented many R&D award policies,which provide this study a firm foundation for an empirical investigation.By manually combing the data of government innovation awards obtained by Chinese A-share listed companies,this study makes an empirical analysis on the effect of government innovation awards and also finds the incentive effect of government innovation awards on firm performance as well as the signal financing and innovation plus mechanisms.Although the three types of R&D subsidy policies can promote firm performance,there is still limited literature to compare and analyze the similarities and differences of their effects.Evaluating and comparing the effects of R&D subsidy policies in different stages is helpful to clarify the relationship between subsidy types and firm innovative growth,which has great practical significance and provides ground for an in-depth investigation for this study.However,due to the different implementation scope of different types of R&D subsidy policies,there is a huge difference in the sample size when exploring each subsidy policy separately and comparing the effects of the three types of subsidy policies,which leads to the problem of dealing with endogeneity.Therefore,with an objective to explore the relationship between three types of government R&D subsidies and firm performance respectively,this study further compares the relative effects of three types of policies on corporate innovative performance by using the sub-samples that firms get three kinds of subsidies at the same time.The above analysis also submits the differences of three types of polices and the possible reasons.The empirical results show that R&D subsidy type has a significant heterogeneity effect on firm innovative performance.Concretely,R&D project subsidies can significantly promote the innovation input,innovation output,and performance of enterprises;selective tax incentives relatively do not significantly promote corporate innovation input and output;however,they can still stimulate the firm performance;government innovation awards promote the innovation output and performance of enterprises,however,the incentive to the innovation input is relatively poor.To explore the reasons for the differences,this study explores the relationship between R&D subsidy types and technological innovation efficiency from the perspective of subsidy efficiency by using data envelopment analysis(DEA)method.The empirical results show that the types of subsidies also exert heterogeneous effects on the technological innovation efficiency of enterprises i.e.,R&D project subsidies do not significantly improve the firm innovation efficiency,while selective tax incentives and government innovation awards can improve the innovation efficiency.Therefore,this study argues that different types of subsidies perform different roles in stimulating firm innovative performance.The ex-ante R&D subsidies promote firm performance and rely on scale expansion rather than efficiency improvement.The in-process type R&D subsidies may promote firm innovative performance by improving innovation transformation and the profitability of innovative products.The ex-post R&D subsidies show better comprehensive performance,however,they belong to ex-post incentive policies and cannot play the role reducing innovation risk,such as ex-ante and in-process type R&D subsidies.This study brings to light the following aspects.First,the government needs to improve the financial subsidy policy system for corporate innovation.It is better to improve the support for science and technology in a targeted way rather than blindly.At the same time,government should strengthen the coordination among the three types of R&D subsidy policies,promote the connection with the capital market,which is helpful to give full play to the "multiplier effect" of government financial support.The government should also try to optimize the operation process of R&D subsidy system and reduce the application cost.Second,the government should build the supervision and feedback mechanism of R&D subsidies.The effectiveness of signal financing mechanism of government R&D subsidies is closely related to the government’s supervision,feedback,and information disclosure after the implementation of subsidies.Therefore,the government should establish and improve the screening mechanism and exit mechanism of subsidies,improve the information disclosure mechanism of R&D subsidies,optimize the implementation process of subsidy policies and establish the feedback mechanism of subsidy utilization so as to improve the efficiency of enterprises using subsidies.Third,enterprises should apply for corresponding types of R&D subsidies on demand and make full use of subsidies to improve innovation efficiency.Enterprises should not only decide whether to apply for subsidies,but also how to apply for R&D subsidies.According to the specific characteristics of innovation market failure,they should choose the corresponding subsidies or subsidy combination in order to promote the long-term firm innovative growth.It is also important for enterprises to consider the cost burden of applying for R&D subsidies and avoid unproductive rentseeking behaviors.