How can China's subsidy promote the transition to electric vehicles?

Promoting the transition from traditional fuel vehicles to electric vehicles can significantly reduce carbon emissions and dependence on oil. Government subsidies play a pivotal role in this transition process. However, the extant research mainly quantifies the effects of these subsidies on research and development investments or patents, failing to depict the actual extent of transformation. This study emphasizes the influence of government subsidies on transformation rather than research and development performance, and the contingent conditions under which the subsidies prove effective. To achieve these objectives, this analysis utilizes unbalanced panel data from 128 listed companies in the Chinese auto industry, spanning from 2010 to 2020 with a fixed-effect model. The results show that: (1) government subsidies have a negative impact on the extent of enterprise transformation towards electric vehicles, moreover, (2) this negative effect is mitigated, and even reversed by tightening technical requirements and reducing subsidy intensity. To promote the transformation to electric vehicles, this work suggests that financial support should target the bottlenecked parts of the industrial chain; promote the development of emerging industries from the demand side, and interweave these efforts with market mechanisms. The study also advises policymakers to conduct thorough analyses of the incentive effects of various options, based on the principles of mechanism design theory.