The impact of China's R&D subsidies on R&D investment, technological upgrading and economic growth

This paper investigates the impact of research and development (R&D) subsidies on R&D inputs and their wider economic effects. The empirical analysis employs a structural vector autoregressive (VAR) model using a panel of Chinese provinces during the 2000-2010 time period. In support of a partial crowding-out view, public R&D subsidies allocated to large and medium-sized enterprises (LMEs) are found to increase total R&D inputs proxied by total R&D personnel, despite reducing privately-financed R&D inputs. Specifically, we find that an increase of R&D subsidies by one standard deviation decreases private R&D expenditures in LMEs by 6.5%, but increases total R&D personnel in LMEs by 2.6%. We also find evidence that the effects of R&D subsidies extend beyond their main effect on corporate R&D, promoting technological upgrading, capital deepening, and economic growth. We further find evidence suggesting some misallocation of research-oriented public funds. The findings help shed important insights into the ongoing debate regarding the role of the state in promoting innovation in a transitioning economy context.