NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Corruption, Government Subsidies, and Innovation: Evidence from China

Lily Fang, Josh Lerner, Chaopeng Wu, Qi Zhang

NBER Working Paper No. 25098
Issued in September 2018
NBER Program(s):Corporate Finance Program, Productivity, Innovation, and Entrepreneurship Program

Governments are important financiers of private sector innovation. While these public funds can ease capital constraints and information asymmetries, they can also introduce political distortions. We empirically explore these issues for China, where a quarter of firms’ R&D expenditures come from government subsidies. Using a difference-in-differences approach, we find that the anticorruption campaign that began in 2012 and the departures of local government officials responsible for innovation programs strengthened the relationship between firms’ historical innovative efficiency and subsequent subsidy awards and depressed the influence of their corruption-related expenditures. We also examine the impact of these changes: subsidies became significantly positively associated with future innovation after the anti-corruption campaign and the departure of government innovation officials.

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Document Object Identifier (DOI): 10.3386/w25098

 
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