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

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.