How Do Government Subsidies Affect Innovation? Evidence from Chinese Hi-Tech SMEs

Dong Xiang (), Roman Matousek, Andrew C. Worthington and Yue Jiang
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Dong Xiang: Qilu Institute of Technology, Jingshi Road, Jinan 250200, China
Roman Matousek: School of Business and Management, Queen Mary University of London, Mile End Road, London E1 4NS, UK
Andrew C. Worthington: Department of Accounting, Finance and Economics, Griffith University, 170 Kessels Road, Nathan, QLD 4111, Australia
Yue Jiang: Business School, Shandong Normal University, 1 Daxue Road, Changqing, Jinan 250358, China

Sustainability, 2025, vol. 17, issue 15, 1-23

Abstract: This paper examines the effectiveness of government subsidies in fostering innovation among small and medium-sized enterprises (SMEs), with a particular focus on additionality, crowding-out, and cherry-picking effects. Using the latest national survey data on Chinese high-tech SMEs, we apply robust econometric techniques—including the Heckman selection model, structural equation modeling (SEM), and propensity score matching (PSM)—to address potential selection bias and endogeneity. Our findings reveal that government subsidies positively influence both innovation inputs and outputs, suggesting a predominant additionality effect rather than a crowding-out effect, at least within high-tech SMEs. However, subsidies do not appear to alleviate the financial constraints faced by most SMEs, indicating that they are insufficient as a standalone solution to financing challenges. Furthermore, state ownership enhances input additionality but does not significantly impact output additionality. We also find evidence of cherry-picking in subsidy allocation, with loans exhibiting stronger additionality effects on innovation compared to grants and tax credits, which are more prone to selective intervention. These findings highlight the need for more targeted subsidy policies that prioritize financially constrained firms with high innovation potential while mitigating government selectivity. Our study offers valuable insights for policymakers seeking to design more effective innovation support mechanisms for high-tech SMEs.

Keywords: government subsidies; SME innovation; additionality; crowding out; cherry picking (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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