Effectiveness of R&D subsidies depending on firm financial risks: evidence from Chinese listed firms

In this study, we investigate firm heterogeneity with respect to the financial risk that determines the effectiveness of public R&D subsidies. Using panel data of Chinese listed firms from 2007 to 2018, we find that firms with high financial risk are more responsive to government innovation funding. This positive impact is significant with respect to both private R&D spending and patent applications, but only for risky firms. Moreover, simultaneously considering another conventional criterion, firm size, we find that financially risky small-sized firms are most sensitive to public funding. The generalised propensity score and text mining methods are used to control for endogeneity in terms of the quantity and quality of innovation subsidies for robustness checks. This study suggests that priority should be given to small risky firms, as this criterion can screen out enterprises that are innovative and financially constrained.