The effect of government subsidies on firms’ innovation performance: does subsidy continuity matter?

Abstract

ABSTRACT This study investigates the effects of government subsidies on firms’ innovation performance along with the role of subsidy continuity. Using data from Chinese industrial enterprise between 2002–2007 and 2011–2015 and considering firms’ historical records of receiving government subsidies, we divided the firms into different categories based on their recipience of subsidy continuity and checked for heterogeneous treatment effects among them. The results showed that subsidized firms invest more in R&D and demonstrate superior performance in TFP compared to non-subsidized firms. Furthermore, the stimulatory effects on R&D investment and TFP are more pronounced for firms that receive repeated and continuous government subsidies. In addition, the impact of subsidy continuity on innovation performance is more significant for non-state-owned firms, small firms, low-profit firms, and firms with fewer fixed assets. This may be because continuous subsidies can help firms overcome financing constraints, which in turn fosters innovation performance. Our findings contribute to the understanding of the diverse effects of government subsidies on firm innovation and provide insights into the possible channels for achieving such outcomes.