Working Paper: NBER ID: w25432
Authors: Hong Cheng; Hanbing Fan; Takeo Hoshi; Dezhuang Hu
Abstract: The Chinese government has been using various subsidies to encourage innovations by Chinese firms. This paper examines the allocation and impacts of innovation subsidies, using the data from the China Employer Employee Survey (CEES). We find that the innovation subsidies are preferentially allocated to state owned firms and politically connected firms. Of these two (state ownership and political connection), political connection is more important in determining the allocation. We also find that the firms that receive innovation subsidies file and receive more patents, are more likely to introduce new products, but do not necessarily file and receive more patents abroad. Finally, the firms that receive innovation subsidies do not have higher productivity, more profits, or larger market shares. Overall, the results point to inefficiency of allocation of innovation subsidies and show that the subsidies encourage only incremental innovations and not radical ones.
Keywords: Innovation subsidies; Chinese firms; Political connections; Patents
JEL Codes: O25; O38; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political connections (D72) | Likelihood of receiving innovation subsidies (O38) |
| Receiving innovation subsidies (O38) | Likelihood of filing and receiving patents (O34) |
| Receiving innovation subsidies (O38) | Introduction of new products (O36) |
| Receiving innovation subsidies (O38) | Productivity (O49) |
| Receiving innovation subsidies (O38) | Profitability (L21) |
| Receiving innovation subsidies (O38) | Market share (D33) |
| Receiving innovation subsidies (O38) | Quality of innovation (L15) |