Government Subsidies, R&D Investment And Firms’Performance

Facing increasingly fierce competition, enterprises considered technological innovation as the key element for their survival and development, since it is helpful with new products promotion, market share expansion and profitability increasement. Chinese enterprises still lag behind in R&D investment due to the existence of knowledge spillover, which is a sort of market failure. Usually, government subsidies are used to solve this problem for they can make up for the money shortage as well as encourage enterprises’own R&D expenditure. In this way, enterprises will play the dominant role in R&D investment, contributing to the improvement of firms’ performance as well as the country’s overall innovation capability. It is necessary to study the relationship among government subsidies, R&D investment and firms’ performance in the context of Chinese government’s vigorously promotion of the construction of an innovative country.This thesis selects Chinese bio-pharmaceutical listed companies as the study sample, since firstly, bio-pharmaceutical industry is widely considered as R&D-intensive, requiring continuous product innovation. Secondly, it is a highly-supported emerging high-tech industry by Chinese central government in the recent "12th Five-Year Plan" and few domestic researches focus on this field. Based on theoretical analysis and literature reviewing, this thesis builds an empirical model to examine the correlation between government subsidies and firms’R&D investment as well as the correlation between R&D investment and firms’performance. I use the firm-level panel data with a sample of39Chinese bio-pharmaceutical listed companies from2004to2011. The following facts are confirmed through the empirical tests:(1) For bio-pharmaceutical listed companies in China, government subsidies are positively related to firms’ R&D investment, suggesting that government subsidies would promote rather than crowd out firms’ private R&D investment;(2) The R&D spending decision is a dynamic and continuous process, this term’s expenditure is closely related previous term’s expenditure. Firm size is not a decisive factor of R&D expenditure in bio-pharmaceutical industry, small and medium companies are more actively involved in R&D activities if they receive government subsidies;(3) R&D expenditure has a negative effect on current firms’performance, specifically, the operating margin. But in the long run, due to time-lag effect, R&D investment could increase firms’ profitability and improve firms’performance. Usually, it takes nearly two years for the incentive effect to reach its maximum.Based on the previous empirical results, policy recommendations are offered:(1) Government should continue to pour money into developing the bio-pharmaceutical industry;(2) Improve IPR (intellectual property right) protection system in China;(3) Diversify financing sources for bio-pharmaceutical companies, developing debt, equity and venture capital market;(4) Bio-pharmaceutical companies should make concerted efforts to attract innovative personnels and push for international cooperation with the world’s first-class bio-pharmaceutical companies and research organizations.