Public selection and research and development effort of manufacturing enterprises in China: state owned enterprises versus non-state owned enterprises

Abstract

This paper investigates the allocation of public subsidies and firms’ research and development (R&D) effort. Considering the reality of China, we focus on the comparison between state owned enterprises (SOEs) and non-state owned enterprises (SOEs). We apply a variety of propensity score matching methods to a large sample of Chinese manufacturing firms. We find strong evidence that the allocation of public subsidies is biased towards SOEs. Meanwhile, SOEs tend to maintain higher levels of R&D investment than matched non-SOEs. Though the empirical results are consistent with the existing literature which suggests that firms with higher levels of R&D investment are more likely to get supported by public agencies, our findings evidenced from China indicate it is the strong political connections and less information asymmetry associated with state ownership that sees public subsidies allocated, rather than the “picking the winner” strategy implemented by public agencies.