Not Only Additionality: The Dual Effects of Subsidies on Firm Innovation

Based on the concept of additionality, we intend to explore the influence mechanism of subsidies on firms’ innovation, as well as contingent conditions of the mechanism. We apply the PSM method and two-stage estimations with instrumental variables to test our hypotheses. Our analysis shows that subsidy has no significant effects on firms’ R&D input, while it positively affects innovation cooperation. Meanwhile, subsidy negatively moderates the relationship between firms’ R&D input and output, and positively moderates the relationship between firms’ innovation cooperation and output. Furthermore, we find an inverted U- shaped relationship between subsidy and output additionality. We also find that state ownership negatively moderates the moderating effects of subsidy. This study is a more fine-grained theory on the impacts of subsidies on firms’ innovation.