Opening the box of subsidies: which is more effective for innovation?

Government research and development (R&D) subsidy is one of the main policy instruments to deal with market failure, and its effectiveness has attracted attention increasingly. This study investigates the impact of two types of government R&D subsidies on innovation using the data of Chinese listed enterprises from 2010 to 2016. We find that compared with ex-post rewards, ex-ante grants have a better effect on innovation performance by stimulating private R&D investment. Additionally, the effectiveness of government R&D subsidies is weakened in enterprises engaging in rent-seeking and political connections. This study provides a new perspective for understanding the effect of government R&D subsidies, and the research conclusions are the relevant reference for the government to improve the efficiency of allocating public funds.