FISCAL SUBSIDIES, INNOVATION QUALITY, AND TRANSMISSION MECHANISMS: EMPIRICAL EVIDENCE FROM CHINESE LISTED FIRMS

Abstract

Firms' indigenous innovation capability constitutes the fundamental driving force and a decisive determinant of national scientific and technological progress, and fiscal R&D subsidies play a pivotal role in incentivizing corporate technological innovation. Using panel data from Chinese A-share listed firms over the period 2010–2020, this study systematically examines the impact of fiscal subsidy intensity on firms' innovation quality, the underlying transmission mechanisms, and the relevant policy boundary conditions. To address potential endogeneity concerns, this study employs a Bartik instrumental variable (IV) approach. The empirical results indicate that fiscal subsidies exert a significantly positive effect on firms' innovation output. Mechanism analyses reveal that fiscal subsidies promote corporate innovation by alleviating non-productive rent-seeking activities, enhancing firms' market competitiveness, and improving market valuation, thereby strengthening the role of capital market confidence in stimulating R&D investment. Heterogeneity analyses further show that the innovation-enhancing effects of fiscal subsidies are more pronounced among local state-owned enterprises, firms in technology-intensive industries, and small firms facing external financing constraints. These findings suggest that future policy design should further optimize the structure of fiscal subsidies by directing resources toward high-technology firms and financially constrained small enterprises, while simultaneously strengthening regulatory and supervisory mechanisms.