Research Of Firm’s Two-stage Decision On R&D Investment Under Government Subsidy

As the resources shortage and environment destruction, China is facing the transformation from the extensive economy growth mode depending on investment and demographic dividend to intensive economic growth mode, which depends on technical innovation and productivity increasing. In the process of the transformation and upgrading of Chinese economy, as the main subject in innovation, to promote the technical innovation activities and R&D investments in the firms has become the key in increasing the quality of products and the competitiveness of firms. Under the innovation strategy, the influences of government subsidies on R&D activities of the firms are the main issues discussed in this paper. The research of R&D investment decisions in firms mainly focuses on theoretical models, while the relation between government subsidies and R&D decisions in firms are lack of empirical study and it neglects that R&D decisions include two stages. In reality, a number of firms have no R&D activities, so only the firms having R&D activities need to decide the amount of investment. So the R&D decisions of firms are divided into two stages:whether to invest and how much to invest.Based on the extension of Gonzalez’s model, the model of firm’s two-stage decision on R&D investment under government subsidy is concluded. And the theoretical mechanism of the influence is analyzed, showing a positive effect of government subsidy on firm’s two stage decision on R&D investment. Using the sample of Chinese industrial firms in2007and Heckman two-step method solving selective bias in samples, the empirical results show a significant positive effect of government subsidy on firms’two-stage R&D activities. The instrument variable is taken to solve the endogenous problem, also reflecting the improvement effects of government subsidy on firm’s R&D. As to the influences of ownership, state-owned firms are more intended to develop R&D activities than foreign and private firms in the first decision stage; the influences of ownership on R&D activities are negative or not significant in the second decision stage. The influences of other control variables have differences in the two stages of R&D decisions, indicating that the influencing factors are different in two stages of firm’s R&D decisions. The divisions according to state-owned, foreign and private firms show the same result that government subsidy has a positive role in firm’s R&D decisions. The comparisons of estimated coefficients reflect that the incentive effects on foreign and private firms are greater than those on state-owned firms.