Abstract
To investigate the relationships between financial constraints, government subsidies, and corporate innovation, a semi-logarithmic fixed-effect panel model and mediation effect test were applied, based on the data of Chinese listed companies from 2007 to 2017. We find that (1) financial constraints suppress corporate innovation. (2) Government subsidies are targeted at bailing out firms facing financial constraints. (3) Government subsidies promote corporate innovation (4) Government subsidies partially offset the suppression of financial constraints on innovation. We contribute to the fields of public finance, corporate finance, and corporate innovation by: (1) justifying the government subsidies target strategy as a bailout of corporate financial constraints, (2) verifying the corporate-innovation promotion of government subsidies, thus justifying the efficiency of government subsidies, and (3) showing that different types of innovation benefit differently from subsidies, thus justifying subsidies as a structural innovation engine.
Highlights
Chinese corporations have been accused of benefiting from potential unfair competition caused by the government subsidies; this has drawn more attention since the Huawei-related events
Government subsidies partially mediate the relationship between financial constraints and corporate innovation
On the other hand, according to model (3), the coefficient of SAit is statistically significant, indicating that government subsidies partially mediate between financial constraints and corporate innovation
Summary
Chinese corporations have been accused of benefiting from potential unfair competition caused by the government subsidies; this has drawn more attention since the Huawei-related events. The picking-the-winner strategy with a large subsidy amount might cause unfair competition Another influential target is the political connection bias in the information-asymmetry context [2, 4, 5]. This strategy might cause corruption, and lead to the under-efficiency of subsidies [4, 6]. Whether government subsidies promote or crowd out corporate innovation is still being debated in recent research [14] Another concern is the possible bias or corruption related to political connections [4, 6]. As for the potential targets of government subsidies, we introduced innovative abilities, political connections, and financial constraints, and for the efficiency of government subsidies, we considered corporate innovation. The contents are as follows: Section 2 reviews related literature and presents hypotheses; Section 3 selects variables and sets up empirical models; Section 4 estimates the models and analysis results; Section 5 examines subsamples and introduces different estimating settings as robustness tests; and Section 6 presents our conclusions
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