Can governmental innovation subsidies promote firm innovative economic efficiency? Evidence from China

Yupeng Zhang and Yuchuan Yang

International Review of Financial Analysis, 2025, vol. 106, issue C

Abstract: Governmental innovation subsidies have been widely recognized for their role in stimulating R&D investment and patent applications. However, their influence on firms’ efficiency in translating innovative inputs into competitiveness remains underexplored. In this paper, we introduce the concept of innovative economic efficiency, defined as the elasticity of revenue with respect to R&D expenditure, and assess the impact of governmental innovation subsidies from this critical aspect. Using data on Chinese listed companies from 2012 to 2020, our analysis reveals a significant negative impact of innovation subsidies on innovative economic efficiency. Mechanism analysis indicates that innovation subsidies lead to a reduction in cost elasticity, and the subsidy-induced variation in cost elasticity exhibits a positive correlation with innovative economic efficiency. Taken together, these findings demonstrate that innovation subsidies can adversely affect innovative economic efficiency by decreasing cost elasticity. Our findings reveal the potential downsides of Chinese innovation subsidies, emphasizing the need for fundamental policy reforms.

Keywords: Governmental innovation subsidies; Innovative economic efficiency; Cost elasticity (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:106:y:2025:i:c:s1057521925005605

DOI: 10.1016/j.irfa.2025.104473

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