A Story Conveyed for Emerging Economies: The Transitivity Effects of Subsidy, R&D, and Innovation Within Manufacturing Industries

Presently, research and development (R&D) and innovation have been discussed in diverse ways. However, the nexus of subsidy was relatively unexplored in emerging economies. Furthermore, the effects of age are observed to be inconclusive. Considering 1272 selected Chinese manufacturing firms over the period 2007-2017, we employ fixed effect models to examine the effects of Subsidy on R&D and innovation and whether age was a moderating factor. Consistent with the sandwich theoretical proposition, this article found that there exists a significantly transitive relationship between government subsidy, R&D, and innovation. Whereas young firms perform better in the short-term, state-owned firms outweigh the private ones in performance. Subsequently, age alternatively moderates the R&D and innovation relationship from the perspective of subsidy. Though subsidy is a short-term determinant of R&D, it has a long-term relationship with innovation. In contrast, R&D and innovation have short-term effects based on lag computations. Overall, our findings suggest that government subsidy plays a crucial role in R&D and innovation for emerging markets. We discuss our results within the theoretical frameworks of sandwich, the economics of subsidy, and behavioral theory of R&D.