What is the role of government trust in a firm's R&D investments? Evidence from SMEs

We examine how government trust shapes the R&D behaviors of small and medium enterprises (SMEs). To study this, we use data collected on 3045 Chinese SMEs to find that for every standard deviation increase in the government trust index, an SME has a 23.9% increase in their R&D investments. Our findings are robust after accounting for endogeneity using an instrumental variable and controlling for the impact of social trust. We further discover that SME owners who are more motivated to conduct innovation will make more R&D investments when they trust the government, driven in part by their willingness to take more risks. Finally, the effect of government trust on R&D investments is less salient when the region has a high marketization level.