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EMAC 2023 Annual

Do R&D subsidies drive innovations? From the resource additionality and signaling perspectives

Published: May 24, 2023


Jun Li, Shanghai University of Finance and Economics; Ruby Lee, Florida State University


Although research and development (R&D) subsidies are key inputs for innovation, do they affect all innovation types equally and how? To answer this question, the authors first separate radical innovation from incremental innovation, and theorize that R&D subsidies not only provide a firm with additional financial resources for different innovation types but also serve as a market signal to attract equity financing. They further rely on top management team (TMT) literature to study how TMT capability interacts with R&D subsidies to affect equity financing and innovation. Integrating signaling and resource additionality perspectives with the TMT literature, the authors test their premise on over 2000 firms using the propensity matching score and difference-in-difference methods. Results largely confirm their premise, suggesting that practitioners should understand R&D subsidies’ impacts on different innovations in conjunction with TMT capability and equity financing.