Effect of the Strategic Emerging Industry Support Program on Corporate Innovation among Listed Companies in China

Abstract

In this paper, we analyze the relationship between the Chinese government’s Strategic Emerging Industry Support Program and the innovation level of strategic emerging industry firms. We use panel data of A-share-listed firms from 2007 to 2017 and apply a difference-in-difference model. We obtain evidence that firms exhibit strategic innovation behavior in response to the Strategic Emerging Industry Support Program, as evidenced by firms focusing solely on increasing their research and development (R&D) input and number of patent outputs, neglecting innovation efficiency and quality, and failing to convert patent results into firm profitability. Moreover, we observe that the aforementioned support program, through the provision of subsidies, tax incentives, and easy access to credit, as well as the reduction in stock liquidity, prompts increases in firm R&D input and, consequently, the number of patents firms are granted. Our results also indicate that for state-owned enterprises in strategic emerging industries, government support in the form of subsidies and tax incentives has the strongest effect on innovation; by contrast, for private firms, innovation is more strongly stimulated through convenient credit support, tax incentives, and reduced stock liquidity. This paper provides empirical evidence on whether industrial policy promotes firm innovation and argues more generally whether government industrial policy is effective.