Picking ‘Winners’ in China: Do Subsidies Matter for Indigenous Innovation and Firm Productivity?
37 Pages Posted: 7 Nov 2016
Date Written: November 6, 2016
Relying on firm-level data from China, this paper combines matching techniques with a structural framework to study the effects of public subsidies across multiple stages of innovation and the implications for productivity. The findings reveal that public subsidies reduce firms’ economic performance despite promoting indigenous innovation, at least in the higher technology industries. Policymakers may tolerate lower average efficiency if they expect that some of the state-backed firms will go on to become successful innovators, and in turn generate significantly large social welfare payoffs. However, the findings do not support such an expectation, thus bringing into question whether the social payoff from picking ‘winners’ justifies the cost.
Keywords: Picking Winners, State Subsidies, R&D, Innovation, TFP, China
JEL Classification: O30
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