The effect of government subsidies on firms’ private investment and innovation capacity : evidence from the firm-level data in the Chinese wind industry

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2017-05

Authors

Gao, Xue

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Abstract

Scientific knowledge is a public good, so a firm’s investment in technology innovation is below the most socially efficient level. To correct this market failure, government subsidies are necessary to stimulate firms’ private investments and innovation activities, especially at the early development stage of an industry. Although there is a great deal of research studying the relationship between government subsidies and innovations in developed countries, only a few studies focus on developing countries, and even fewer focus on emerging industries in developing countries. This paper aims at studying the effect of the Chinese government’s subsidies on firms’ private investments and innovation outcomes by using Chinese wind firms’ data in 2007. In order to capture the average treatment effect of government subsidies, this paper used the propensity score matching method. The results show that government subsidies have no effect on firms’ innovation outcomes and private R&D investments. This paper further suggests that these non-ideal policy outcomes might result from the immaturity of the Chinese wind industry in 2007, the insufficient amount of government subsidies and/or the uncertainty of subsidies’ persistence.

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