Industrial Subsidies and Firm Innovation: New Evidence from China (Japanese)

Hongyong Zhang

Discussion Papers (Japanese) from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Using detailed information on more than 250,000 subsidy projects to Chinese listed manufacturing firms from 2007 to 2019, this paper empirically analyzes the relationship between industrial subsidies and firm innovation. Main results are as follows. First, both the number of projects and the amounts of industrial subsidies increased rapidly in recent years. In 2019, 97% of firms received at least one subsidy project and the average subsidy intensity reached to 1.8%. Importantly, the scale of subsidies for R&D and patent are larger than the subsidies for production, trade, and foreign investment. Furthermore, state-owned enterprises' share in total subsidies is declining but on average they still receive 2~3 times more subsidies than private firms. Second, at the industry- and firm- levels, subsidies are positively associated with R&D investment and patent applications. There are large variations across industries, but the positive correlations became very strong after 2015. Third, using project-level data on subsidies and difference-in-difference (DID) estimations, we examine the effects of Made in China 2025 (MIC2025) program. We find that compared with firms not receiving MIC2025-related subsidies, firms received MIC2025-related subsidies see significant increases in R&D investment (14.9%), the number of patent applications (18.3%), and the number of patent registrations (24.9%). Our results suggest that the industrial subsidies contribute to the innovation activities of Chinese firms. However, though industrial subsidies significantly increased firms' investment and sales, their effects on firm productivity were very limited.

Pages: 47 pages
Date: 2021-12
New Economics Papers: this item is included in nep-com and nep-sbm
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