The impact of government subsidies on the persistence of firm innovation: evidence from China

Abstract

ABSTRACT How the government subsidies will change the performance of firm’s innovative projects has long been debated. We attempt to narrow this gap from a dynamic perspective by employing Chinese A-share listed firms as a sample. Based on the novel innovation index, we studied the impact of government subsidies on the persistence of firm innovation. Findings show that total government subsidies promote the persistence of overall firm innovation. However, when we divided the total government subsidies into technological subsidies and non-technological subsidies, we found that technological subsidies cast an inhibitory effect on the persistence of self-sustaining firm innovation. In further analysis, we discover that ‘self-sustaining firm innovation investment replacement’ phenomenon can explain the crowding-out effect of technological subsidies on self-sustaining firm innovation persistence. Based on empirical evidence, we also observed that the substitution of private innovation investment by technological subsidies may result in management costs. These findings offer a theoretical foundation for further enhancing the effectiveness of government subsidy policies.