Does Government R&D Subsidy Have Signaling Effect?

As research and development (R&D) has spillover, high risk and othercharacteristics, enterprises often encountered financing problems in R&D process.Government subsidies for R&D enterprise can compensate for the problem ofinsufficient funds to some extent, and thus have enormous social benefits. However,government funding is limited, government alone obviously cannot meet the needs ofthe whole society. Therefore, how to guide social capital flows to the developmentprojects needed for the society has become an important research topic.This paper argues that government subsidies can produce crowd-in or crowd-outeffect on R&D investment, as well as certification effect on enterprise, which passesthe investment signals to outside investors. In order to accurately describe thesignaling effect of government R&D subsidies, and to deeply analyze the mechanismbehind, based on the signaling model in information economics and based on theclassification of the research projects, the paper sets two scenarios: subsidies withquality signal and subsidies without quality signal, respectively, and discusses theinteraction between government subsidies and loans from financial institutions. Thestudy finds out that, if government subsidies can only distinguish the basic researchand applied research of the project, the signal of government subsidies is invalid forfinancial institutions. If the government has set certain quality threshold beforemaking subsidies decisions, the quality signal will be transmitted to outside investors,at this time, the government subsidies will guide the funds of financial institutions toR&D project that is beneficial to society, thus producing signaling effect onenterprises and projects that have received subsidies.To further verify the above proposition with empirical research, taking China’shigh-tech industry as the research object, and using the industry panel data from1998to2008, the paper analyzes the role of government R&D subsidies in alleviatingenterprises’ difficulty in R&D investment with the use of dynamic panel model. Theempirical results show that government R&D subsidies will produce positive effectfor enterprises to obtain loans from financial institutions, also enterprise scale, and industry technical standards will variously affect the crowd-in effect. In addition, thepaper also considers the impact of ownership and regional marketization degree onthe certification effect of government R&D subsidies, the findings showed that instate-owned enterprises and regions with lower marketization degree, the extent ofgovernment subsidies to crowd in loans from financial institutions reduced or becameinsignificant, indicating that the level of local government governance as well asmarketization degree both have a significant impact on the efficiency of capitalallocation in the region. Further robustness test showed that the results of empiricalresearch are reliable.The research findings also provide a useful reference for the local government todevelop policies on R&D subsidies. Before making a decision about subsidies,government can set certain quality threshold to screen the applied projects. Thengovernment should make a scientific decision after extensive research and review, andconvey the information to the society in a public way, thus easing the problem ofasymmetric information between companies and outside investors, and improving theinnovation investment and capacity of the entire society.