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With the understanding that innovation and high technology industries are essential for sustained economic development, government R&D subsidies have become ubiquitous. However, existing studies on the impact of R&D subsidies have found mixed or conflicting results. Insights from resource dependence theory (RDT) and the Attention‐Based View (ABV) help account for these discrepancies. This study of Chinese high technology firms using the Innovation‐Oriented Firms Database from the Ministry of Science and Technology, finds an inverted U‐shaped relationship between R&D subsidies and innovation performance. The article shows that high government resource dependency, expressed through high percentage of R&D spending coming from government subsidies, diverts attention resources in recipient firms and results in declining innovation performance. The article then tests the impacts of different managerial responses on the dependency‐innovation relationship and find that technology alliances and employee feedback systems mitigate these negative effects. These findings have implications for government innovation policies and firm‐level responses to those policies: government subsidy policies have limits to their effectiveness and firms have strategic options for capitalizing on government resources without sacrificing innovativeness.

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This paper explains why many small and medium-sized (SME) private hightechnology Chinese manufacturing firms survive and thrive within an institutional and political system arrayed against them. We use the mobile phone handset industry as an illustrative case of the vitality and capabilities of Chinese SMEs. We argue that in capitalizing on the advantages offered by the global fragmentation of production, while also being constrained by an institutional climate of structured uncertainty, Chinese non-state firms have chosen a pattern of incremental innovation in their search for competitive advantage. Despite falling outside central government innovation plans and engaging in practices inimical to nurturing novel product innovation capabilities, these firms have a sustainable business model based on niche tailoring, rapid product introduction and utilization of standardized components.