A reevaluation on the effectiveness of subsidies on firm's innovation: Evidence from newly categorized subsidy data

Governments of most countries are deeply involved in boosting firm's innovation with various policy tools. However, the effectiveness of subsidies, a major policy tool, on innovation has been found mixed in the literature. In this paper, we explore in-depth the heterogeneous effectiveness of different types of subsidies with newly categorized subsidy data of Chinese listed firms. We find that both general and earmarked subsidies contribute to an increase in innovation input of firms. When innovation input is controlled, earmarked subsidies see strongest positive effect on output, while talent subsidies are effective on invention patent. Further evidence shows that earmarked subsidies closely related to firm's main business are more effective. These findings help governments enhance the effectiveness of innovation subsidies by earmarking on firm's main business and avoid duplicated preferential policies.