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CMS
9,1
Government support and firm
innovation performance
Empirical analysis of 343 innovative
38 enterprises in China
Jiuchang Wei and Yang Liu
School of Management, University of Science and Technology of China,
Hefei, China

Abstract
Purpose – This paper aims to examine the effect of government support on the innovation
performance of firms in the Chinese context.
Design/methodology/approach – We divided government support into vertical support and
horizontal support, and adopted an empirical research approach in this study. We collected the data of
343 enterprises in China that had been identified as innovative enterprises, including their characteristic
data, government support data and patent data. Negative binomial regression was used to
quantitatively examine the relationship between government support and the innovation performance
of firms.
Findings – Both vertical support in the form of direct research and development (R&D) subsidies and
horizontal support in the form of regional innovation policy positively influence the innovation
performance of firms. In addition, direct R&D subsidies are more likely to experience the enhanced
benefits of carrying out tax credit policy on the innovation performance of firms.
Originality/value – This study contributed to the innovation literature by distinguishing two types
of government support, namely, vertical support and horizontal support, and assessing the effects of
government support on firm innovation in the Chinese context.
Keywords China, Government support, Horizontal support, Innovation performance,
Vertical support
Paper type Research paper

Introduction
Competition among firms gradually depends on the capacity of firms to become
continually innovative in a cost efficient manner against the background of economic
globalization, rapid technology development and industry convergence (Dodgson et al.,
2008; Schilling, 2005; Zhang and Li, 2010). Government support for firm research and
development (R&D) activities is a key incentive to encourage the innovation
performance of firms (Herrera and Nieto, 2008). Therefore, the use of government
support in cultivating private R&D activities and innovation performance is a
well-recognized practice in several countries. A statistical survey by Eurostat (2009)
reports that the percentages of public support in R&D investment from the mid-1990s to
Chinese Management Studies
Vol. 9 No. 1, 2015
pp. 38-55 This research was funded by the Key Projects in the National Science & Technology Pillar
© Emerald Group Publishing Limited
1750-614X
Program 2015BAH18F01, the National Natural Science Foundation of China 71373250 and
DOI 10.1108/CMS-01-2015-0018 61311120470 and Anhui Science of Science Foundation grants 12020503004.
the mid-2000s were approximately 35, 30 and 18.5 per cent in the European Union 27 Innovative
(EU27), the USA and Japan, respectively. In emerging economies such as China, enterprises in
government investment in R&D activities was roughly USD10 billion in 2012.
The body of empirical analyses on the effectiveness of government support on
China
private R&D activities and innovation performance is considerable. Several economists
justified government support for R&D activities considering the fact that market
failures would lead the firm sector to under-invest in R&D and prevent firms from 39
reaching their socially optimal level (Arrow, 1962; Stiglitz, 1988). Such market failures
refer to the problems of informational asymmetries, financial market imperfections and
incomplete appropriability of R&D returns. The “public good” characteristics of R&D
activities would hinder R&D investors from capturing all of the potential benefits of
their R&D investment because other firms may have the opportunity for a free ride.
Financial market imperfections may also engender the negligence of socially valuable
R&D activities of the firms even if R&D investment could be fully appropriated
(Griliches, 1986; Hall, 2002). Considering the constraints of market failures on R&D
activities, government support, via direct R&D subsidies, tax credits and other forms, is
used as a policy instrument to fill this gap.
Previous empirical studies have examined the effectiveness of different types of
government support that is used in stimulating the innovation performance of firms,
such as direct R&D subsidies, tax incentives, public research performed in public
agencies, knowledge transfer from universities and R&D consortia (Bérubé and
Mohnen, 2009; David et al., 2000; Guellec and van Pottelsberghe De La Potterie, 2003; Xu
et al., 2014). Nevertheless, the majority of these studies were in favor of one or two forms
of government policies for innovation performance based on evidence from actual
situations in a certain country or industry context; thus, the integration of different
types of government incentives and the interaction effects between different types merit
an investigation (Xu et al., 2014). Moreover, previous research has focused on developed
countries, mainly the EU countries, Japan and the USA. Scanty empirical studies have
examined other countries, particularly emerging and developing countries such as
China. Thus, very little is known about how exactly the Chinese government support
within different types is related to the innovation performance of firms in China.
To fill these gaps in innovation research, our study draws on industrial policy theory
(Lazzarini, 2013) to investigate the effects of government support on firm innovation
performance. Government support, as a public policy instrument, can be divided into
two dimensions, namely, vertical support and horizontal support (Lall and Teubal, 1998;
Lazzarini, 2013; Sapir et al., 1993). These two dimensions may have different effects on
innovation performance. Specifically, vertical support aims to promote particular firms
or industries, whereas horizontal support helps improve the environmental context that
is crucial to the innovation processes of firms (Jansen et al., 2006; Lichtenthaler, 2009).
Hence, the current paper examines the effect of vertical support and horizontal support
of government support on firm innovation performance using empirical data from
China. In addition, considering the fact that government agencies may implement
vertical support policies together with horizontal support policies, this study
investigates the mutual effects of vertical support and horizontal support on innovation
performance.
The subsequent section reviews existing studies and proposes hypotheses for our
analysis. Section 3 presents and explains the adopted sample data and the methodology.
CMS Section 4 describes and analyzes the empirical results. Finally, Section 5 presents the
9,1 concluding comments, discussion and implications for both theoretical work and
managerial practice, and directions for future research.

Theoretical development and hypotheses

Innovation research suggests that government support in the form of public policy
40 instruments is closely associated with private R&D spending and innovation
performance (Xu et al., 2014; Zúñiga-Vicente et al., 2014). These public policies, to some
extent, belong to “industrial policy” because this policy refers to governmental
interventions that aim to promote productive investments, which would not occur in a
market economy that is devoid of these interventions (Cimoli et al., 2006; Pack and Saggi,
2006). According to the classification of industrial policy, government support can be
further divided into two categories, namely, vertical and horizontal (Lall and Teubal,
1998; Lazzarini, 2013; Sapir et al., 1993).

Vertical support
Vertical support is designed to promote particular firms or industries, and refers to the
benefits provided to a specific sector but not to the entire sector (Beason and Weinstein,
1996). Based on the characteristic of vertical support, the most common example of a
vertical support mechanism is the subsidized credit program that aims to stimulate
investments in certain firms, regions or industries. With regard to innovation research,
two viable types of vertical support to initiate the innovation performance of firms are
available.
The first type of vertical support pertains to government R&D subsidies, which are
crucially vital to firm innovation due to several reasons. First, firms seldom afford
adequate capital to innovate because R&D activities are time-consuming and capital
intensive (Harrison et al., 2001). Government R&D subsidies are a significant external
source for assisting firms to innovate. Second, the “public good” characteristics of R&D
activities and technology imitation by rivals would hamper the motivation of R&D
investors to innovate. Government R&D subsidies may reduce this problem and
encourage technology spillover. Consequently, government R&D subsidies may be
positive to firm innovation performance:
H1a. Government R&D subsidies are positively related to the innovation
performance of firms.
The second type of vertical support pertains to government scientific research project
subsidies. We view government scientific research project subsidies as a form of vertical
support because almost all of the scientific research projects that are collectively
established by firms, universities and public research institutions are financially funded
and supported by the Chinese government. Government subsidies on scientific research
projects can promote knowledge transfer from universities and public research agencies
to firms (Cohen et al., 2002; Spencer, 2001) and thereby facilitate the access of firms to
external resources to develop new knowledge that may improve firm innovation
performance (Xu et al., 2014). Therefore, vertical support in the form of research project
subsidies facilitates the innovation performance of firms:
H1b. Government scientific research project subsidies are positively related to the
innovation performance of firms.
Horizontal support Innovative
Horizontal support involves principal government policies that yield externalities to enterprises in
firms and other sectors (Lazzarini, 2013). Meanwhile, several previous studies have
indicated that firm innovation processes are embedded in the environmental context
China
according to the contingency theory (Jansen et al., 2006; Lichtenthaler, 2009).
Specifically, horizontal support seeks to improve the business environment of
innovation in the country or region and increase the rate of capturing the potential 41
benefits of individual R&D investment. Given that horizontal support does not focus on
a certain firm or industry, governmental assistance tends to relocate external resources
and facilitate firm entry, and the selection of firms or sectors will be left to market forces
(Lazzarini, 2013). For this reason, the current study presents two forms of horizontal
support, namely, regional innovation policy and tax credits.
Regional innovation policy refers to the efforts and measures that are undertaken to
build a regional innovation system, thereby increasing the level of R&D spending by
improving the regional capacity to absorb public (i.e. education or government) funding
(Chaminade and Vang, 2008; Oughton et al., 2002). A regional innovation system can
drive the evolution of regional innovation processes and enhance the innovation
performance of firms located in that region (Asheim and Isaksen, 2002). The
implementation of regional innovation policy allows the local government to play the
roles of a catalyst, an animator and a dynamic force to strengthen the inter-relationships
among all of the relevant regional agents. Consequently, horizontal support in the form
of regional innovation policy can help promote the innovation performance of firms by
enhancing the regional innovation capability:
H2a. Regional innovation policy is positively related to the innovation performance
of firms.
Tax credits are another representative type of horizontal support. The major
characteristic of tax credit programs relative to direct R&D subsidies is that the former
is more neutral with respect to a certain industry and the essence of the firm; moreover,
tax credit programs can minimize the discretionary choices that are involved in program
selection for government support (Czarnitzki et al., 2011). Hence, tax credits are
managed to encourage the broadest range of firms to engage in R&D activities. Previous
research has indicated that tax credits not only stimulate private R&D activity (Dahlby,
2005; Dagenais et al., 1997) but also increase the innovation output of the recipient firms
(Czarnitzki et al., 2011). Therefore, tax credits are more likely to stimulate the innovation
performance of firms:
H2b. Tax credits are positively related to the innovation performance of firms.

Interaction between horizontal support and vertical support

In our research model, government is a central element that affects the innovation
performance of firms through vertical and horizontal support. Vertical support is more
likely to affect the process of specialized resources through deliberate targeting,
whereas horizontal support can provide a sufficient supply of regional-level flexible
resources. Thus, skilled government policymakers tend to make an outstanding
combination of vertical and horizontal support policies that simultaneously yield
flexible and specialized resources (Lall and Teubal, 1998; Lazzarini, 2013). Neglecting
horizontal support would induce “failures of omission”, as proposed by Krueger (1990),
CMS including a weak educational system and an unpleasant business environment.
9,1 Similarly, neglecting vertical support may not necessarily solve the externality problem
(Rodrik, 2004; Aghion, 2011). Bérubé and Mohnen (2009) recently illustrated that firms
that benefitted from both tax credits and R&D grants are dramatically more innovative
than firms that merely benefitted from tax credits. Notwithstanding the lack of
empirical studies that systematically examined the interaction between vertical and
42 horizontal support on innovation performance, we expect the occurrence of a
complementary relationship between vertical support and firm innovation performance
through horizontal support:
H3a. With regional innovation policy, government R&D subsidies are more
positively related to the innovation performance of firms.
H3b. With regional innovation policy, government scientific research project
subsidies are more positively related to the innovation performance of firms.
H3c. With tax credits, government R&D subsidies are more positively related to the
innovation performance of firms.
H3d. With tax credits, government scientific research project subsidies are more
positively related to the innovation performance of firms.
Overall, we summarize the framework of this research in Figure 1.

Methods and measures

Research setting
Our study focuses on the firm-level analysis unit, which was advocated by
Zúñiga-Vicente et al. (2014) and other scholars (Ali-Yrkkö, 2004; David et al., 2000; Levy
and Terleckyj, 1983). Moreover, the empirical setting of our analysis is the innovative
enterprises that have been identified by the Ministry of Science and Technology of the
Chinese government[1]. Innovative enterprises are characterized by the following
features:
• a well-developed capability to transform the market and technology conditions at
a given time to manufacture higher-quality,
 lower-cost products over time than its
rivals (Lazonick, 2002; Sonobe and Otsuka, 2006);
• an increase in patenting activity, proving the significance of innovation as the
primary sector;

Horizontal support
H2 (+)

Innovation
H3 (+) performance

Figure 1.
Concept model. H, H1 (+)

hypothesis Vertical support

 • equipped with the core technology of intellectual property rights, famous brands Innovative
rights. Innovative enterprises also have a stronger international competitiveness; enterprises in
use innovative concepts and organizational culture as a guide, technical China
innovative activities as support undertakings, and R&D, absorption or
re-innovation as methods; and constantly innovate to encourage enterprises to
achieve sustained and stable development (Wang et al., 2010); and
• have obtained or tend to obtain considerable government subsidies (this 43
characteristic is supported by evidence) (Lazonick, 2007).

Data sources
The sample of analysis firms was obtained in the following manner. First, we created a
list of innovative enterprises that had received governmental R&D subsidies with
different amounts. Nevertheless, this mode of identification may exclude innovative
enterprises whose private R&D activities have not been subsidized directly (i.e. no
vertical support) but have been granted horizontal support. To account for this
omission, we collected all of the firms that had been identified as innovative enterprises
(both at the national and provincial levels) in Anhui Province since 2013. Among these
firms, those with no vertical support from the government accounted for 33 per cent of
the sample, reflecting the fact that governments tend to select partial firms to maximize
the success rate of public subsidies. A review by Zúñiga-Vicente et al. (2014) also pointed
out that most empirical studies that tested the effectiveness of public subsidies had been
based on cross-sectional data by the firm or even the plant, and these data could also
account for the heterogeneity among those agents (firms, plants or establishment) that
are potential receivers of public subsidies. We collected 354 firms in our sample using
this approach.
Second, in line with our primary research objective, 354 innovative enterprises in
Anhui province were selected by Anhui Science & Technology Committee from a list of
14,514 firms on the basis of five indicators, namely, R&D intensity, number of
authorized inventions and patents per 1,000 R&D staff members, proportion of new
product sales in the major business income, overall labor productivity, organizational
innovation and development of management[2]. The sample firms included those that
operate in several industries, such as chemical industry, information and
communication, medical manufacturing industry, electrical equipment industry,
automobile industry and other manufacturing industries. With the assistance of Anhui
Science & Technology Committee, we collected the detailed data of 354 innovative
enterprises in 2013. To ensure the integrity of the index and calculate the required data,
we only selected 343 firm observations that provided the integrated data and covered
the index values from January 1, 2012, to December 31, 2012.
Finally, the raw data of innovation performance, vertical support, horizontal support
in terms of tax credits and all of the control variables (i.e. firm age, firm size, ownership,
firm R&D and firm funds) were obtained from the cross-sectional data we had collected
from Anhui Science & Technology Committee. The regional innovation policy variable
was calculated by hand-collected data according to firm location; meanwhile, firm
location could be drawn from the Anhui Statistical Yearbook 2013, which was published
by the National Bureau of Statistics of China.
CMS Dependent variables
9,1 Several scholars adopted patent data as a direct measure of the firm innovation
performance in the previous literature because patents have a strong and direct
relationship with innovation performance (Comanor and Scherer, 1969; Mueller, 1966;
Pakes and Griliches, 1984). Patent data are an effective measure of innovation capability
(Acs and Audretsch, 1989; Griliches, 1990). Thus, the metric of innovation performance
44 in our study is the number of granted patents of one firm in 2012.

Independent variables
Vertical support. We measured vertical support by the government as two indicators,
namely, the number of direct R&D subsidies and the number of scientific research
project subsidies. Vertical support aims to exhibit the differential subsidized programs
through deliberate targeting in certain firms (Lazzarini, 2013); hence, public policy
instruments such as direct R&D subsidies, public research support and fiscal incentives
can reflect the unequal treatment of the government on firms, inducing the varying
effect of public subsidies on firm innovation performance (Zúñiga-Vicente et al., 2014).
Thus, the current study adopted the number of received direct R&D subsidies and the
number of scientific research project subsidies with logarithmic form as the vertical
support.
Horizontal support. We measured horizontal support using two variables, namely,
regional innovation policy and tax credits. Specifically, regional innovation policy
variable, as a dummy variable, takes a value of 1 if the firm is located in the Independent
Innovation Pilot Area of Hefei–Wuhu–Bengbu in Anhui Province, and a value of 0 if not.
Independent Innovation Pilot Area of Hefei–Wuhu–Bengbu, which was established by
the Government of Anhui Province in 2008, intends to develop the independent
innovation capability of Anhui Province[3]. The government has laid down several laws
and science and technology policies to encourage innovation to act in concert with the
construction of Independent Innovation Pilot Area of Hefei-Wuhu-Bengbu (PAHWB).
Tax credits refer to the amount of tax credits received by the firm based on its innovative
activities; they have been proved to be neutral with regard to the character of the firm or
the choice of industry (Bérubé and Mohnen, 2009; Czarnitzki and Licht, 2005).

Control variables
Our model includes multiple variables that are frequently contained in models that
explain innovation performance (Crépon et al., 1998; Lahiri and Narayanan, 2013;
Mairesse and Mohnen, 2002).
Firm size. We use the logarithms of total employees as the indicator to account for the
effect of firm size on innovation performance. Larger firms are typically considered
more formidable than small- and medium-sized firms because of their scale effects in
acquiring resources for their innovation activities and business operations (Ettlie and
Rubenstein, 1987).
Firm age. Older firms possess a greater capability to access the capital market, which
increases their reluctance to pursue innovation and decreases their likelihood to apply
for public support programs; by contrast, younger firms adopt a more positive attitude
toward R&D (Almus and Czarnitzki, 2003). Hence, firm age becomes a potentially
significant determinant of innovation activity and the probability of participation in
public research programs (Czarnitzki and Licht, 2006).
 Ownership. Firm ownership can be divided into two dimensions (i.e. state-owned and Innovative
private) according to the proportion of government ownership in total share ownership enterprises in
of one firm. The relationship between firm performance and government ownership
displays an inverted U-shaped pattern, which indicates that slight or extreme
China
government participation means insufficient support from the government to overcome
the hardship and excessive interference and control in economic operations, respectively
(Sun et al., 2002). Other scholars have argued that small and medium firms do not qualify 45
for government support programs unless they are majority-owned (Czarnitzki and
Licht, 2006). Consequently, a dummy variable was applied; the value of 1 was assigned
when a firm belongs to state-owned enterprise, 0 otherwise.
Firm R&D. Firm R&D spending significantly affects the innovation performance of
firms (Cohen and Levinthal, 1990). To account for such possibility, we include firm R&D
spending scaled by the logarithms of the direct expenditure of the private R&D of the
firm as an important control variable.
Firm funds. Firm funds refer to the amount of self-financing in scientific research
projects that were established by the government and the firm, aiming to sufficiently
fund the promotion of technology activities. Compared with firm R&D spending, firm
funds can exact an indirect and long-time influence on innovation performance. We also
consider the logarithms of firm funds.
Firm location. Previous research has indicated that governments prefer to invest in
areas with a high economic level (Porter, 2000). Other scholars have also confirmed the
positive relationship between innovation level and economic prosperity (Oughton et al.,
2002). Considering the fact that 343 innovative enterprises are distributed in 15 cities of
the entire province, we consider firm location (in terms of gross domestic product per
capital of the location of the firm) to control the effects of the different levels of economic
development on innovation performance.

Models
Negative binomial regressions were adopted to test the effects of government support on
the innovation performance of firms. Four interaction terms were produced (two vertical
support variables ⫻ two horizontal support variables) to test the interaction effects. To
alleviate multicolinearity concerns, we used grand mean centered variables for
interaction terms. The interaction effects were tested in Tables IV and V.

Results
Table I reports the descriptive statistics and bivariate correlations of the dependent,
independent, and control variables.
Tables II and III present the results of the models that predict vertical support and
horizontal support on innovation performance, respectively.
In Table II, Model 1 reports the results of only the control variables, Models 2 and 3
include the direct effects of vertical support in terms of R&D subsidies and scientific
research project subsidies, respectively (H1a and H1b), and Model 4 illustrates the
results of the complete model with two forms of vertical support. Similarly, in Table III,
Models 1 and 2 report the effects of regional innovation policy and tax credits separately
(H2a and H2b), which represent horizontal support. Moreover, Model 3 presents the
results of the entire model with two variables altogether.
 9,1

46
CMS

Table I.

correlations
and Pearson
Descriptive statistics
Variable Mean SD 1 2 3 4 5 6 7 8 9 10

1 Innovation performance 31.66 80.83

2 Regional innovation policy 0.48 0.50 0.11
3 Tax credits 4.62 2.62 0.48*** 0.08
4 R&D subsidies 3.06 2.64 0.59*** 0.07 0.38***
5 Scientific research project subsidies 4.69 3.48 0.36*** 0.01 0.24*** 0.66***
6 Firm age 16.53 13.90 0.05 0.01 0.13 0.14 0.15
7 Firm size 6.19 1.27 0.36*** ⫺0.05 0.35*** 0.44*** 0.56*** 0.23**
8 Ownership 0.27 0.45 0.26*** 0.20* 0.29*** 0.28*** 0.19* 0.31*** 0.25***
9 Firm R&D 7.24 1.39 0.77*** 0.07 0.68*** 0.55*** 0.42*** 0.18* 0.62*** 0.33***
10 Firm funds 6.76 2.00 0.46*** 0.02 0.63*** 0.41*** 0.26*** 0.21** 0.51*** 0.26*** 0.79***
11 Firm location 10.53 0.48 0.12 0.43*** 0.15 0.10 0.07 ⫺0.05 0.02 0.18* 0.13 0.15

Notes: N ⫽ 343, * p ⬍ 0.10; ** p ⬍ 0.01; *** p ⬍ 0.001

Innovation performance Model 1 Model 2 Model 3 Model 4
Innovative
enterprises in
Vertical support China
R&D subsidies – 0.049** (0.022) – 0.044* (0.025)
Scientific research
project subsidies – – 0.024 (0.026) 0.008 (0.020)
Firm age ⫺0.010** (0.004) ⫺0.010** (0.004) ⫺0.010** (0.004) ⫺0.009** (0.004)
Firm size 0.316*** (0.070) 0.297*** (0.071) 0.305*** (0.071) 0.295*** (0.071)
47
Ownership 0.311** (0.152) 0.272* (0.151) 0.305** (0.151) 0.274** (0.151)
Firm R&D 0.214*** (0.056) 0.207*** (0.057) 0.198*** (0.057) 0.202*** (0.058)
Firm funds ⫺0.032 (0.035) ⫺0.040 (0.035) ⫺0.029 (0.035) ⫺0.038 (0.035)
Firm location 0.338*** (0.115) 0.334*** (0.115) 0.331*** (0.116) 0.332*** (0.115)
Constant ⫺3.698*** (1.227) ⫺3.583*** (1.227) ⫺3.585*** (1.237) ⫺3.555*** (1.232)
Observations 343 343 343 343 Table II.
Wald chi-square 191.61 196.39 193.55 196.54 Negative binomial
Log likelihood ⫺1,406.610 ⫺1,404.220 ⫺1,405.638 ⫺1,404.142 results of innovation
performance: vertical
Notes: * , ** , *** mean statistically significant at 10, 5 and 1% level, respectively support

Innovation performance Model 1 Model 2 Model 3

Horizontal support
Regional innovation policy 0.303** (0.129) – 0.322** (0.130)
Tax credits – 0.022 (0.026) 0.029 (0.025)
Firm age ⫺0.011** (0.004) ⫺0.010** (0.004) ⫺0.011** (0.004)
Firm size 0.341*** (0.070) 0.299*** (0.073) 0.320*** (0.072)
Ownership 0.300** (0.151) 0.312** (0.151) 0.298** (0.151)
Firm R&D 0.191*** (0.056) 0.213*** (0.056) 0.188*** (0.056)
Firm funds ⫺0.030 (0.035) ⫺0.036 (0.035) ⫺0.035 (0.035)
Firm location 0.192 (0.127) 0.317*** (0.117) 0.154 (0.131)
Constant ⫺2.304* (1.330) ⫺3.438 *** (1.262) ⫺1.868 (1.375)
Observations 343 343 343 Table III.
Wald chi-square 197.04 192.31 198.36 Negative binomial
Log likelihood ⫺1,403.894 ⫺1,406.258 ⫺1,403.234 results of innovation
performance:
Notes: * , ** , *** mean statistically significant at 10, 5 and 1% level, respectively horizontal support

We introduce the interaction term between vertical support and horizontal support on
innovation performance in Tables IV and V.
Table IV shows the interaction term between regional innovation policy and vertical
support (R&D subsidies and scientific research project subsidies) (H3a and H3b),
whereas the interaction effect between tax credits and vertical support (R&D subsidies
and scientific research project subsidies) (H3c and H3d) is presented in Table V.
First, we hypothesized a positive relationship for the effect of vertical support on
innovation performance (H1a and H1b). Our results (␤ ⫽ 0.049; p ⬍ 0.05) indicate a
significant positive effect of R&D subsidies on innovation performance (Table II,
Models 2 and 4), which means that H1a is supported. This result is consistent with
previous research that had confirmed that public R&D subsidies could stimulate private
CMS Innovation
9,1 performance Model 1 Model 2 Model 3 Model 4

Horizontal support
Regional innovation
policy 0.312** (0.128) 0.312** (0.128) 0.316** (0.129) 0.383* (0.199)
48 Vertical support
R&D subsidies 0.050** (0.022) 0.050** (0.022) – –
Scientific research
project subsidies – – 0.027 (0.017) 0.0343 (0.024)
Horizontal support ⫻ vertical support
Regional innovation
policy ⫻ R&D
subsidies – 0.001 (0.041) – –
Regional innovation
policy ⫻ project
subsidies – – – ⫺0.014 (0.031)
Firm age ⫺0.010** (0.004) ⫺0.010** (0.004) ⫺0.010** (0.004) ⫺0.010** (0.004)
Firm size 0.323*** (0.071) 0.323*** (0.071) 0.331*** (0.070) 0.330*** (0.070)
Ownership 0.257* (0.151) 0.258* (0.151) 0.293* (0.151) 0.292* (0.151)
Firm R&D 0.184*** (0.056) 0.184*** (0.057) 0.172*** (0.057) 0.171*** (0.057)
Firm funds ⫺0.039 (0.035) ⫺0.039 (0.035) ⫺0.026 (0.035) ⫺0.025 (0.035)
Table IV. Firm location 0.182 (0.127) 0.182 (0.127) 0.175 (0.129) 0.173 (0.129)
Negative binomial Constant ⫺2.143 (1.329) ⫺2.143 (1.329) ⫺2.098 (1.346) ⫺2.118 (1.351)
results of innovation Observations 343 343 343 343
performance: Wald chi-square 202.22 202.22 199.46 199.65
interaction of Log likelihood ⫺1,404.305 ⫺1,401.305 ⫺1,402.682 ⫺1,402.587
horizontal support
and vertical support Notes: * , ** , *** mean statistically significant at 10, 5 and 1% level, respectively

R&D spending and subsequently promote innovation performance (Almus and

Czarnitzki, 2003; Zúñiga-Vicente et al., 2014). Nevertheless, the coefficient (␤ ⫽ 0.024,
n.s.) for scientific research project subsidies is reported as positive but not statistically
significant (Table II, Models 3 and 4), which indicates that H1b is not supported.
Second, we hypothesized that the effect of horizontal support on innovation
performance is positive when overarching governmental policies are involved (H2a and
H2b). We find support for this hypothesis on the effect of regional innovation policy only
(Table III, Models 1 and 3). H2a predicts that regional innovation policy can stimulate
the innovation performance of firms. In all of the models that included the variable of
regional innovation policy, the coefficients are positive and significant consistently (␤ ⫽
0.303, p ⬍ 0.05; ␤ ⫽ 0.322, p ⬍ 0.05); thus, H2a is supported. As indicated in Table III,
Models 2 and 3, the regression coefficient for tax credits is positive but not statistically
significant on innovation performance (␤ ⫽ 0.022; ␤ ⫽ 0.029 n.s.), which fails to
empirically support H2b.
Finally, we hypothesized that the effect of vertical support on innovation
performance is strengthened when horizontal support is increased (H3a, H3b, H3c and
H3d). Specifically, H3a predicts a positive interaction of regional innovation policy and
R&D subsidies. Expectedly, Models 1 and 2 in Table IV yield a marginally positive
Innovation
Innovative
performance Model 1 Model 2 Model 3 Model 4 enterprises in
China
Horizontal support
Tax credits 0.019 (0.025) 0.023 (0.025) 0.021 (0.026) 0.020 (0.171)
Vertical support
R&D subsidies 0.048** (0.022) 0.042* (0.022) – – 49
Scientific research
project subsidies – – 0.024 (0.017) 0.024 (0.017)
Horizontal support ⫻ Vertical support
Tax credits ⫻ R&D
subsidies – 0.013* (0.008) – –
Tax credits ⫻ S & R
Project subsidies – – – 0.006 (0.006)
Firm age ⫺0.010** (0.004) ⫺0.009** (0.004) ⫺0.009** (0.004) ⫺0.009** (0.004)
Firm size 0.282*** (0.073) 0.254*** (0.075) 0.289*** (0.073) 0.274*** (0.074)
Ownership 0.272* (0.151) 0.288* (0.150) 0.305** (0.151) 0.318** (0.151)
Firm R&D 0.206*** (0.057) 0.198*** (0.056) 0.197*** (0.057) 0.194*** (0.057)
Firm funds ⫺0.044 (0.035) ⫺0.038 (0.035) ⫺0.033 (0.035) ⫺0.031 (0.035)
Firm location 0.316*** (0.117) 0.312*** (0.116) 0.311*** (0.118) 0.307*** (0.118) Table V.
Constant ⫺3.360*** (1.261) ⫺3.141*** (1.258) ⫺3.342*** (1.270) ⫺3.215** (1.272) Negative binomial
Observations 343 343 343 343 results of innovation
Wald chi-square 196.94 199.86 194.20 195.32 performance:
Log likelihood ⫺1,403.946 ⫺1,402.482 ⫺1,405.316 ⫺1,404.754 interaction of
horizontal support
Notes: * , ** , *** mean statistically significant at 10, 5 and 1% level, respectively and vertical support

relationship; however, the relationship is not statistically significant (␤ ⫽ 0.001, n.s.).

Thus, H3a is not supported. H3b predicts a positive interaction of regional innovation
policy and scientific research project subsidies. As indicated in Models 3 and 4 in
Table IV, the coefficient for the interaction of regional innovation policy and scientific
research project subsidies is negative but not statistically significant (␤ ⫽ 0.014, n.s.),
which fails to support H3b. H3c and H3d predict a positive relationship between tax
credits and R&D subsidies, scientific research project subsidies, respectively. Our
results indicate that the interaction of tax credits and R&D subsidies on innovation
performance is positive and significant (␤ ⫽ 0.013, p ⬍ 0.1) (Table V, Models 1 and 2);
meanwhile, the interaction of tax credits and scientific research project subsidies on
innovation performance is positive but not statistically significant (␤ ⫽ 0.006, n.s.)
(Table V, Models 3 and 4). Thus, H3c is supported but H3d is not.

Discussion and conclusions

Conclusions
Given the previous analysis, government can play the role of the potential determinant
of firm innovation performance rather than a mere exogenous factor that influences the
innovation activities of the firm. Empirical evidence is provided in this study to analyze
the effect of government support (i.e. vertical support and horizontal support) on
innovation performance in the Chinese transition economy. The results indicate that
CMS direct public R&D subsidies granted to a certain firm can positively affect innovation
9,1 performance. This finding is in line with previous studies that revealed the tendency of
public R&D subsidies to stimulate complementary firm-financed R&D and promote
innovation performance (Zúñiga-Vicente et al., 2014). The current study also points out
that regional innovation policy that aims to develop the innovation capability of a
certain area positively affects the innovation performance of the firm located in that
50 area. This finding suggests that government should play a key role in encouraging
innovation by implementing regional policies. However, evidence is lacking with regard
to the effects of scientific research project subsidies and tax credits on innovation
performance. With respect to scientific research project subsidies, the non-significant
effect on innovation performance can be explained as follows: receiving public funding
in terms of direct subsidies in one year can stimulate additional firm R&D activities in
the next year or the year after next year, which reflects the time lag effect of public
funding (Lach, 2002; Zúñiga-Vicente et al., 2014). Moreover, evidence is lacking with
regard to the interactive effects between vertical support and horizontal support on
innovation performance, except for R&D subsidies and tax credits. This finding
suggests a stimulating and significant effect of public R&D subsidies on innovation
performance for firms that are recipients of tax credits.

Theoretical contributions
Despite considerable attention on the impact of government intervention in private
innovation activities, our understanding of the effect of government support (i.e. vertical
support and horizontal support) on innovation performance remains incomplete. Our
work contributes to the existing literature in several aspects.
First, we have contributed to the innovation literature that focuses on assessing the
effects of government support by presenting a new antecedent of government
intervention in the Chinese context. Most of the empirical studies were accomplished
using data from the EU countries, the USA and other developed countries
(Zúñiga-Vicente et al., 2014). Scant studies have examined developing countries, in
addition to Özçelik and Taymaz (2008) for Turkey and Xu et al. (2014) for China.
Financial support for capital-based R&D activities in enterprises in developing
countries such as China is insufficient. Our findings help fill this gap that assesses the
effect of government support on innovation performance in emerging economies.
Second, this study adds to the innovation literature by distinguishing two types of
government support, namely, vertical support and horizontal support, and identifying
their effects on innovation performance. Previous research that examined the effects of
public policy instruments on firm innovation performance principally focused on one or
two forms of such instruments, including direct R&D subsidies (David et al., 2000),
knowledge transfer (Xu et al., 2014), fiscal incentives (i.e. tax credits) (Bérubé and
Mohnen, 2009) and public research performed in public agencies (Guellec and van
Pottelsberghe De La Potterie, 2003). Recent research has suggested that other forms of
public policy instruments (except R&D subsidies) should be addressed to assess
government support (Xu et al., 2014). Therefore, we investigate four types of
government support (i.e. R&D subsidies, scientific research project subsidies, regional
innovation policy and tax credits) and classify them into two categories (i.e. vertical and
horizontal support), according to the industrial policy theory (Lazzarini, 2013).
 Third, as discussed in the Western literature, direct public R&D subsidies are eager Innovative
to exert additional effects on private R&D spending and innovation capability enterprises in
(Zúñiga-Vicente et al., 2014). In our regression model, we have proved that direct R&D
subsidies positively affect the innovation performance of firms. Our results also indicate
China
that a regional innovation policy can improve the innovation performance of a firm
located in that area, and tax credits on behalf of horizontal support can positively affect
R&D subsidies that represent vertical support on innovation performance. These 51
results contribute to the enrichment of innovation research that assesses government
support.
Finally, firm heterogeneity is extremely relevant for distinguishing governmental
strategies. To our knowledge, several factors such as firm age, firm size, ownership and
firm location can affect innovation performance. Our results indicate that firm age
negatively affects innovation performance, which suggests that new firms are more
likely to attain better innovation performance than well-established firms. Moreover,
both firm size and ownership positively affect innovation performance; the results of
this study keep pace with existing research that is conducted in developing countries.
Hence, our results shed new light for Chinese government policymakers on the decision
to maximize the success rate of subsidized projects.

Managerial implications
This study provides several managerial implications for both governmental
policymakers and managers who seek to improve firm innovation performance. Our
findings indicate that government support is an effective means of enhancing the
innovation performance of firms in emerging economies such as China. Governments
have significantly invested in assisting firms to become more innovative. However,
different support mechanisms may generate varied results as revealed in our research.
Assessing and identifying the effective mode of support mechanisms from various
support forms is considerably crucial for governmental policymakers. As our results
have illustrated, both vertical support in the form of direct R&D subsidies and
horizontal support in the form of regional innovation policy are efficient modes for
governmental policymakers. In addition, direct R&D subsidies are more likely to
experience the enhanced benefits of carrying out tax credit policy on innovation
performance. From the perspective of managers, firms can boost innovation
performance by receiving government support, which suggests that firms should seek
to establish a strong relationship with government officials. Managers should
cautiously use the different forms of support in integrating internal resources and
exploiting external resources.

Limitations and future research directions

The empirical analyses present mixed results on the causal effects of government
support on the innovation performance of firms. Nevertheless, our research has several
limitations that suggest directions for future research. First, considering that the result
regarding the effect of scientific research project subsidies on innovation performance is
not significant, we should focus on the time-lagged effect of government support on the
innovation performance of firms. Other scholars have raised this issue, but a few
empirical studies feature the time lag structure of government support on innovation
performance (Xu et al., 2014; Zúñiga-Vicente et al., 2014). Further studies are suggested
CMS to adopt longitudinal micro-data that encompass several years at the firm or plant level
9,1 to address this issue. Second, the sample of the current study was collected from
innovation enterprises that had been identified by the Chinese government in Anhui
Province; therefore, the results may not be fully applied to other provinces and countries.
Future studies could provide additional insight into the comparison of Chinese firms
and firms in other countries.
52
Notes
1. www.most.gov.cn/tpxw/200807/t20080729_63284.htm
2. www.ahkjt.gov.cn/technologi/cjsfw/bmfw/webinfo/2013/09/1377665122826787.htm
3. www.ah.gov.cn/UserData/DocHtml/1/2013/7/12/201307121230238515.html

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Further reading
Hua, C. and Xiang, Z. (2008), “Size of enterprise, intensity of R&D, intensity of subsidies, and
government subsidies performance – Empirical study on Zhejiang private science and
technology enterprises”, Science Research Management, Vol. 2 No. 2, pp. 37-33.

Corresponding author
Yang Liu can be contacted at: [email protected]

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