Abstract
Although government direct-financing in firms’ R&D investment can contribute to firm innovation, it remains ambiguous how firms deploy these resources to different types of innovation– explorative versus exploitative innovation. In this study, we adopt the behavioral agency perspective which is an integration of agency and prospect theory, and propose that government direct-financing in firm R&D projects decreases the risks of innovation for firms, contributing to both types of firm innovation, especially the explorative innovation. However, a firm's prior financial performance and industry peer innovation performance can have opposite moderating effects on the relationship between government direct-financing in R&D and the two types of innovation. These hypotheses are largely supported with tests using a rich survey data set of firms based in China. Implications for research and practice will be discussed.
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