The Effectiveness of Government Subsidies on Manufacturing Innovation: Evidence from the New Energy Vehicle Industry in China

Abstract

Manufacturing innovation is of strategic importance to China in its effort to reshape future technology. This study explores the impact of government subsidies on the research and development (R&D) intensity of China's new energy vehicle (NEV) enterprises. The dynamic relationship between government subsidies and R&D intensity is tested with a panel regression model and a threshold regression model. We find that government subsidies have a significantly positive impact on R&D intensity when considering the sample group as a whole, but market profit does not contribute to R&D intensity. As for the sub-sample, government subsidies have a significantly positive impact on R&D intensity in assembly enterprises but are insignificant in supporting enterprises. Two threshold values are also identified with the logarithm of government subsidy. We find that government subsidies have a significant crowding in effect on the R&D intensity of NEV enterprises. With the increasing of government subsidy, the crowding in effect weakens gradually. The policy implication is that the structure of government subsidies should be optimized. More demand-oriented policy instruments should be adopted to cultivate the market. The government subsidies should be reduced gradually until full withdrawal.

The Impact of Government Subsidies on Private R&D and Firm Performance: Does Ownership Matter in China’s Manufacturing Industry?

“…Similarly, Lee and Cin [14] pointed out that government subsidies were beneficial to the R&D investment of Korean small and medium-sized enterprises. Jiang et al [15] found that government subsidies had a significantly positive impact on R&D intensity of China's new energy vehicle enterprises. Other scholars [9,[16][17][18][19][20] also found that direct government funding stimulated private R&D investments.…”

System Dynamics Model for the Evolutionary Behaviour of Government Enterprises and Consumers in China’s New Energy Vehicle Market

“…(1) Governments have two strategies: they either choose the price subsidy policy or choose the R&D subsidy policy. Government subsidies can be divided into industrial subsidies and consumption subsidies in China [7]. To support the healthy development of the NEV market and reduce pollution from vehicle exhaust, the government subsidises enterprises and consumers who purchase NEVs through R&D subsidies for enterprises and price subsidies for consumers.…”

“…The evolution process of the three parties is shown in Figure 2. For governments, the price subsidy policy is still the best subsidy policy in the NEV market [7]. Over time, the number of governments choosing price subsidies in the market steadily increases.…”

“…The cancellation of Beijing's municipal subsidies for battery EVs implies a downward trend in subsidy policies, and future subsidy policies may be completely cancelled. However, government subsidies have a significantly positive impact on R&D of enterprises [7]. Therefore, to stimulate the development of NEV market, the government may choose to strengthen the R&D subsidy policy for enterprises.…”

Input, Output, and Behavioral Additionality of Innovation Subsidies

“…The literature on the effect of subsidies on innovative firms began in the 2000s, seeking to determine if there was a crowding-out effect on the companies internal R&D expenditure. In general, these studies found this effect is positive, and firms receiving subsidies end up spending a higher amounts of R&D than they would have spent without the subsidy, that is, the so-called input additionality effect (Aerts & Czarnitzki, 2004;Aerts & Schmidt, 2008;Almus & Czarnitzki, 2003;Busom, 2000;Cerulli & Potì, 2008Choi & Lee, 2017;Chudnovsky, Lopez, Rossi, & Ubfal, 2006;Cin, Kim, & Vonortas, 2017;Czarnitzki & Delanote, 2015;Czarnitzki, Ebersberger, & Fier, 2007;Czarnitzki & Hussinger, 2018;Czarnitzki & Lopes-Bento, 2012Engel, Rothgang, & Eckl, 2016;González & Pazó, 2008;Görg & Strobl, 2007;Heshmati & Lööf, 2005;Jiang et al, 2018;Lach, 2002;Sanguinetti, 2005).…”