Impact of Government Subsidies on Manufacturing Innovation in China: The Moderating Role of Political Connections and Investor Attention
Round 1
Reviewer 1 Report
The submitted research paper is highly current and interesting.
It is necessary to check the formal arrangement and the English language by the authors of the research article.
Part: 4. Results and Discussion needs to be supplemented and improved. there is a lack of literary sources that have been carried out in a similar area of research.
Author Response
Response to Reviewer 1 Comments
Point 1: It is necessary to check the formal arrangement and the English language by the authors of the research article.
Response 1:
First, In accordance with editing requirements, we have selected the language editing service of the journal.
At the same time in accordance with the requirements of language editing, citations to the CSMAR database have been added to explain its source (on line 490).
Otherwise, we modified the format of the formula to make it look better (line 635 to line 645).
Finally, we added the result report on Hypothesis 2 (line 662 to line 666).
Point 2: Part: 4. Results and Discussion needs to be supplemented and improved. there is a lack of literary sources that have been carried out in a similar area of research.
Response 2:
We have increased the discussion of the data results to supplement and improve the view of our article with literary sources in a similar area of research (line 714 to line 764).
“4.2. Discussion
In order to understand the impact of public R&D support on corporate R&D activities, we explored data on listed companies in China’s manufacturing industry. Through appropriate regression analysis to control the potential endogenous problems of R&D intensity, we find that Chinese government subsidies have a significant positive incentive effect on the R&D intensity of enterprises with different ownerships. Due to market failure and the incomplete adaptability of corporate R&D mechanisms, it is difficult for the government to optimally allocate limited resources in the process of formulating R&D policies [3]. In view of the complexity of public resource allocation and the diversity of stakeholders, it is not easy to scientifically determine the enterprises that public R&D projects should be supported [8]. The government's subsidy program is beneficial to companies that often successfully apply [21]. On the one hand, the government follows the principle of selecting excellent projects and promotes the maximum success rate of supported projects [29]. On the other hand, the government may consider the attempts of certain stakeholders to prioritize rent-seeking companies [25]. Under the mutual influence of these two factors, the government is likely to give priority to funding excellent R&D projects, while also considering projects with a relatively close political relationship [39].
The central difficulty faced by innovation-oriented enterprises is how to obtain financial investment promote the new product development and technology transformation [48]. In the less developed world countries, the early-stage speculative markets are often under developed for experimental technologies and business efforts [46]. In view of the story of China being portrayed as a successful developing country, the "invisible hand" of the government plays the role of promoter in corporate R&D activities which plays an indispensable role in manufacturing development and industrial upgrading and transformation. However, the idea of economic manipulation for political purposes is not new [50]. Personal social relations and family networks play an important role in economic activities [56]. Politicians have more trust and goodwill towards people and organizations with whom they are closely related. Managers in companies may take personal gains because of their close relationship with a certain politician [53]. In order to meet the political promotion needs of politicians, corporate decision makers may use government subsidies to invest in projects that are not related to research and development [47]. At the same time, the government may invest in some worthless companies due to information asymmetry and bureaucratic incompetence [52]. In the case of imperfect external monitoring mechanisms, the transparency of these funding projects decided by government officials is not high, which gives them a lot of discretion [50]. Therefore, these factors fully explain the internal mechanism of the negative influence of political connections on corporate innovation.
Related projects funded by the government are considered to have relatively low investment risks [29]. The government's investment orientation not only helps investors filter out companies with low R&D capabilities, but also establishes a good image for companies [72]. A government agency is considered more experienced in many past investment projects [76]. As indicators of lower investment risks, the projects with higher expected returns by the governments can attract the attention of external investors and receive more investment [70]. As the analysis becomes more in-depth and scientific, government agencies have better predictions on the focus and development trend of the project [78]. However, investors often only trade companies for which they know the information. Limited investor attention leads to classification learning behavior [73,74]. Therefore, investors tend to deal with public information within the market, rather than company-specific internal information. Baidu Search Index is considered to be the most direct and objective indicator to evaluate investors' attention [74]. Research shows that the attention of external investors has a positive effect on the growth and development of enterprises. Government subsidies are a good signal for private investment to increase corporate R&D capital [68].
Consequently, our findings provide some support for the direction of government investment and the probability that companies can be funded by investors through innovative activities in the future.”
Reviewer 2 Report
Please consider more broadly references to the literature on law and economics on R&D public support.
Author Response
Response to Reviewer 2 Comments
Point 1: Please consider more broadly references to the literature on law and economics on R&D public support.
Response 1:
After accepting the reviewer's comments, we added the references to the literature on law and economics on public R&D support, from line 39 to line 91.
“An important factor driving enterprise competitiveness and market economy is innovation [5]. Because the well-known view that market failure will prevent enterprises from reaching the socially optimal level of R&D has been put forward by economists to justify public R&D expenditures by means of public subsidies [6].For this reason, governments design public R&D funding to incentivize enterprises' R&D activities in many countries. According to David [7], the public R&D funding was about 18.5% in Japan, 30% in the United States and 35% in the EU27 from the 1990s to the 2000s. Furthermore, a considerable part of the R&D activities of enterprises are funded by these public funds. In terms of the discovery and diffusion of new technologies, the investment of enterprise R&D departments plays a crucial role in this process [8]. R&D projects with social value may also be ignored by companies, even if the capital market could be gradually improved and innovation could be fully appropriated [9]. Therefore, public R&D investment may fund projects that have low economic returns to enterprises but are meaningful to society. In order to prove the effectiveness of public R&D projects, a large body of scholars have done extensive empirical research. The main focus is on the effect of public R&D subsidies on corporate R&D behavior, that is, whether it is an additional “supplement” to R&D expenses or a “crowding out” to private R&D investment [7].”
In Hypothesis 1, we also supplemented the related literatures on public R&D support. Specifically, the content is from line 185 to line 198.
“Because of the famous view of market failure, companies are unlikely to invest in R&D projects with the socially optimal amount. In a recent survey, Feldman and Kelley [26] suggested that private investment would lead to higher risks for companies’ personal financing decisions. In contrast, public R&D support projects will be seen as carrying a lower minimum rate of return. Public R&D policies can be roughly divided into three categories: direct R&D subsidies [27], R&D tax exemptions [6] and support for various forms of cooperation between enterprises, research universities and high-skilled human capital [7]. Regarding the effect of public R&D support, the measurement results obtained in earlier studies are ambivalent and there are additional effects or crowding-out effects of public R&D support on innovation [28]. Czarnitzki et al. [29] concluded that in public R&D support, tax relief has a positive effect on the R&D of enterprises. In the research on newly industrialized economies, Yang et al. [30] concluded that public R&D policies support the innovation of Taiwanese companies. After studying samples from France and Italy, Carboni [31] came to the opposite conclusion that public R&D support promotes corporate R&D behavior. Czarnitzki et al. [32] provided similar results for firms in Finland and Germany.”
