Do Government Subsidies Promote Enterprises' Substantive Innovation?

The government subsidy program is a means to solve the externalities of the market,in order to help stimulate innovation.With the development of Chinese economy,a great many subsidies have been established in order to boost firm innovation in the last 20 years.These subsidies had a profound influence on firm behavior,industry upgrades and the sustainable growth of the Chinese economy.Based on previous studies,due to the differences of the object,the acquisition of data and the choice of methodology,there are debates on whether government subsidies contribute to firm innovation.Some studies confirm that government subsidies have a positive effect by improving the allocation abilities.Other studies indicate that government subsidies may squeeze out firms'original R&D investment so that firms will have no incentives to innovate.The mechanisms also vary in firms grouped by size,ownership and marketization degree.However,the data is not sufficient to support the analysis of government subsidies,while substantial innovation is hard to evaluate.The paper attempts to examine whether Chinese government subsidies have promoted firms'substantial innovation,and further illustrates the discrepancy among different groups.The paper uses China Employer-Employee Matched Survey(CEES)data to see whether government subsidies have a positive effect on firm innovation.Using patents to measure innovation,patents for invention and new products to measure substantial innovation,the results showthat though there is a demonstrable positive effect on firm innovation in general,however,the effect is not consistent indifferent groups.For big enterprises as well as SOEs,the positive effect is not evident.Further analysis indicates that the reason government subsidies have different influences on different firm groups is the unfair distribution of subsidies.Government subsides lean to big enterprises and SOEs,which interferes with the optimal configuration of limited resources.Besides,special subsides and direct subsidies affect fair competition,which is not in keeping with the original intention of subsidies.Therefore,this article proposes that the government should adjust the object of subsidies,establish the impartial mechanism of subsides and perfect the market-based mechanism of government subsidies,and provide conditions for fair competition.