The Heterogeneous Effects of Central and Local Subsidies on Firms’ Innovation

Abstract

Four decades of rapid economic growth have enabled the Chinese government to dedicate more resources to research and development. China is the world’s second largest spender on food and agricultural research in terms of absolute expenditures and the largest investor on a purchasing power parity basis. Using a unique panel dataset collected in 2019 in China’s seed company and fixed effect models, this study analyzes the heterogeneous effects of central subsidies and local subsidies. Specifically, this study first tests whether government subsidies have a positive impact on firms’ innovation. Then, this study answers whether the impact of local subsidies differs from that of central subsidies. The estimation results show that the central subsidies positively contribute to firm’s innovation, while the impact of local subsidies on firms’ innovation has not been confirmed. Further analysis shows that local subsidies positively affect firms’ economic performance. That is, rather than focusing on research capacity, local governments are more concerned about firms’ current economic performance due to the performance-based promotion scheme in China. Based on this study, local governments should implement similar methods to those of the central government in research project funding and criteria for selecting research projects to promote firms’ innovation.