The time-varying impacts of government incentives on innovation

Abstract

This paper advances extant theoretical research through focusing on the time-varying effects of government fiscal incentives on the innovative performance of firms. Findings show that direct government subsidies favor firms in the short-term, but hinder them in their long-term innovation performance. Indirect tax credit, on the other hand, is favorable to a firm's short-term and long-term innovation performance. Importantly, combining resource-based theory and social capital theory, we suggest that two dimensions of resource endowment — financial and human slack — should be considered in evaluating the effectiveness of incentives. Specifically, our analysis utilizes a unique panel of data from Chinese high-tech companies based in Beijing Zhongguancun Science Park, allowing for our analysis of interior firm variation over time. The study shows solid empirical support for the effects of government incentives over time and offers the interesting result that financial slack positively moderates the relationships between government incentives and firms' innovation performance, while human slack has the opposite moderating role. As such, our paper contributes to the present debate on government incentives in generating innovation, not only by investigating how effects of specific fiscal instruments on innovation performance vary with time, but also by attempting to incorporate firms' resource endowment conditions as contingent factors. Future research directions, implications for innovation research, and policy implications are discussed.