The Impact of R&D Subsidies and Market Competition on Firms' Technological Catch-up

Abstract

This study examines the effects of government R&D subsidies and market competition on firms' technological catch-up. Using data from listed Chinese manufacturing firms from 2011 to 2020, this paper explores the direct and indirect effects of these two factors on the impact of technological catch-up. The results show that although R&D subsidies promote the increase of innovation investment, R&D subsidies expand the technological distance between firms and industry leaders because firms with different market positions that receive innovation investment will have different innovation strategies, and the granting of subsidies exacerbates the degree of asymmetry in confidence between firms and the outside world. Second, market competition inhibits firms' R&D efforts and mitigates the information isolation between firms and the outside world, which ultimately facilitates firms' technological catch-up. This paper also investigates the mediating effects of R&D investment and information asymmetry on the path from R&D subsidies and market competition to technological catch-up. The findings contribute to the understanding of the effectiveness of policy instruments and provide policymakers with insights on how to structure incentives to truly improve firms' innovative capabilities.