The effect of public subsidies on corporate R&D investment: An application of the generalized propensity score

This paper aims to investigate how the effect of public subsidies on corporate R&D investment varies with different levels of public subsidies. Based on the generalized propensity score methodology, we estimate a dose-response function, using a large sample of Chinese manufacturing firms. Our results suggest public subsidies follow an S-shaped relationship and inverted-U correlation with the firm's total R&D and private R&D investment, respectively. There is a saturation point beyond which a further increase in public subsidies does not yield an increase of firm's total R&D investment. A minimum threshold value of public subsidies is required to induce the firm's private R&D spending. There are also critical values beyond which a further increase in public subsidies would partially or completely crowd out a firm's private R&D investment. Our conclusion implies the existence of an optimal interval of subsidy, and thus could help to improve the efficiency of public subsidies.