Government subsidies and total factor productivity of enterprises: a life cycle perspective

The relationship between government subsidies and the total factor productivity of enterprises has been a controversial issue. Recent literature has stressed that the lack of efficient institutional settings increases the tendency to rent-seeking and reduces the productivity performance of enterprises. Moreover, the productivity performances of enterprises vary with their life cycles. In this light, since increasing attention has been directed at the role of government subsidies recently, we have measured the impacts of government subsidies on the total factor productivity of enterprises by exploring the role of the rent-seeking activities and life cycle. Then, a 16-year panel dataset (1998–2013) was organized using enterprise data, which included enterprises whose annual main business income is not less than 5 million yuan from the Chinese equipment manufacturing industry. We found that government subsidies negatively affect the total factor productivity of enterprises and specifically those enterprises in the growth stage. Next, the intermediary analysis confirmed that government subsidies induce unproductive rent-seeking activities, rather than productive rent-seeking activities. Finally, the implications of government subsidy policies for supporting the total factor productivity of enterprises are discussed.