The more subsidies, the longer survival? Evidence from Chinese manufacturing firms

Abstract

How do government subsidies affect firm survival? By using Chinese firm-level data for 1998 to 2007, we show that, on average, there is a positive and significant impact of government subsidies on firm survival. We also investigate the heterogeneous effects of government subsidies with different intensities on firm survival, and find that moderate-intensity government subsidies exert a positive impact on firm survival, while high-intensity government subsidies increase the exit probabilities, the underlying mechanisms via subsidy-seeking investment and innovation incentive weakening are supported by empirical evidence. Furthermore, we explore the role of governance institutions in the subsidy-survival relationship, and find that the positive impact of government subsidies on firm survival is more pronounced in regions with better governance institutions.

Impact of air quality on enterprise productivity: Evidence from Chinese listed companies

“…However, government subsidies may lead to information asymmetry and adverse selection problems, leading to market failure, since enterprises receiving government subsidies are not entirely determined by the market but are also influenced by the relationship between the government and the enterprise (Fox and Heller 2000). To obtain more compensation, enterprises may overstate the degree of air pollution, resulting in rent-seeking behavior by some enterprises (Mao and Xu 2018). When enterprises engage in rent-seeking activities, they will incur corresponding costs.…”

The importance of institutional and financial resources for export performance associated with technological innovation

“…In emerging economies, government subsidies tend to be pervasive and persistence and take various forms, e.g., financial subsidies (e.g., cash) and non-financial subsidies (e.g., loan guarantees or debt forgiveness) (Lee et al, 2014;Lim et al, 2018;Schwartz and Clements, 1999). Firms gain subsidies by establishing rent-seeking connections with politicians as decisions to grant subsidies entirely lie in the hands of governments and the process of government subsidy allocation usually lacks transparency and accountability (Girma et al, 2009;Mao and Xu, 2018). Furthermore, subsidies have a signaling effect, indicating value relevance of accounting information to investors (Lee et al, 2014).…”

“…Institutional resources are useful in increasing the power of firms to advance their business interests, including those in the export markets (Gaur et al, 2014;Girma et al, 2009;Li et al, 2018;Ma et al, 2014;Mao and Xu, 2018;Nuruzzaman et al, 2020;Pan et al, 2014;Zhu et al, 2019). Yet such advantages may not translate into improving export performance through innovation.…”

“…This is because the dynamic environment associated with international markets requires managers to make prompt and effective commercial decisions but institutional resources are likely to distort incentives to make such decisions. Given the expected buffering effects against risks and uncertainties they face in business operations (Chittoor et al, 2009), managers in firms with institutional resources are likely to confront 'moral hazard', and are likely to make 'satisficing' strategy of no or inadequate investments in leveraging innovation for export engagement and export sales or make ineffective decisions without due consideration to the likelihood of failure (Kim et al, 2008;Mao and Xu, 2018). Consequently, institutional resources negatively moderate both export propensity and export intensity.…”

“…Such efforts offer institutional resources for firms to exploit and leverage. Firms' institutional resources can be either ascribed through state-ownership (Li et al, 2018;Nuruzzaman et al, 2020;Pan et al, 2014;Zhu et al, 2019) and business group affiliation (Gaur et al, 2014;Ma et al, 2014), or acquired through government subsidy (Girma et al, 2009;Mao and Xu, 2018). Institutional resources are useful for firms to advance their business interests.…”