Picking ‘winners' in China: Do subsidies matter for indigenous innovation and firm productivity?

Research output: Contribution to journalArticlepeer-review

31 Scopus citations

Abstract

This paper examines the effects of public subsidies across several dimensions of the innovation process and the implications for productivity. As an identification strategy, panel data is used to estimate a structural innovation model that controls for unobserved heterogeneity combined with matching techniques that help ensure comparability between subsidized and non-subsidized firms. The findings reveal that public subsidies reduce firms' economic performance in lower and higher technology industries despite promoting indigenous innovation in the higher technology industries. Policymakers may tolerate lower average efficiency if they expect that some of the state-backed firms will go on to become innovators that go on to generate significantly large social welfare payoffs. Although the findings do not support such an expectation, thus bringing into question whether the social payoff from China's so-called picking ‘winners' strategy justifies the cost.

Original languageEnglish (US)
Pages (from-to)154-165
Number of pages12
JournalChina Economic Review
Volume44
DOIs
StatePublished - Jul 1 2017
Externally publishedYes

Keywords

  • China
  • Innovation
  • Picking winners
  • R&D
  • State subsidies
  • TFP

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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