We examine whether receiving govermnet R&D grant stimulates or crowds out a firm's own spending on R&D in Chinese manufacturing industries. Using a database that spans the population of large and medinm size manufacturing firms of China from 2007 to 2011 and a matching estimator and a matching and difference-indifferences (MDID) estimator, we find a very large firm R&D promoting effect of government R&D for firms that report R&D spending in at least one of the five years: receiving government R&D can lead to a seven to eight million yuan increase in a firm's own R&D expenditures, when the average R&D expenditure ranged from 10 to 13 million yuan. However, this stimulating effect largely disappears once we concentrate the analysis on firms that report R&D expenditures every year, from 2007 to 2011. Our estimates of a patent production function using the same database shows that firms that receive government R&D exhibit much higher productivity of their R&D in generating patents. This may explain why firms react to government R&D grant with more of their own R&D spending.
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