The Impact And Mechanism Of Government Subsidy On Innovation

Currently, there has been a new industrial revolution which is represented by information network, intelligent manufacturing, new energy and new materials. Chinese government has gradually transformed the idea of economic development, trying to let China become a "Innovation Country" instead of "Manufacturing Country". In the 《Report on the work of the government 2015》, Chinese government clearly put forward that we need to develop twin engines to drive development:popular entrepreneurship and innovation.At the same time, government subsidy is an important means to for our government to encourage and promote innovation. Under the guidance of a series of policies, such as "The Strategy of Invigorating The Country Through Science, Technology and Education", Our government invested lots of money each year to support enterprise innovation activities. However, the reality also tells us that, while China’s economy has achieved remarkable development success since 1978, the capability of independent innovation of China’s enterprises is still facing development bottlenecks, and the overall capability of independent innovation is not strong.This paper mainly analyzes the impact and mechanism of government subsidies on the enterprise innovation. In our analytical framework, we take the company’s capital structure, financial structure and financing constraints into consideration, trying to discuss the microscopic mechanism of the effect of government subsidies on the enterprise innovation. We also take a empirical test using the data of the listed companies from manufacturing industry in the period of 2000-2012. Our main conclusion is that, government subsidies significantly enhance both input and output of enterprise innovation, and the effect turns out to be persistent. Moreover, rational capital structure and cash holdings could improve the promotion of government subsidies, which is also closely associated with financing constraints.