The efficiency of corporate R&D investments: Information‐sharing and government subsidies

Abstract

We compare the impact of broad-based equity incentivesand government R&D subsidies on the efficiency of corpo-rate innovation. Chinese corporations that offer broad-based incentives for employees and managers demonstrategreater R&D investment efficiency, as evidenced by a higherratio of innovation outputs to cost allocation. Conversely,firms receiving government R&D subsidies demonstratelower efficiency. Accounting for endogenous treatments ina multi-treatment framework, we suggest an information-sharing environment is critical for efficient capital allocation.Government agencies will likely provide subsidies based oninformation different from what firm headquarters mighthave, while broad-based incentive programs encourageemployee coordination, enhancing efficiency and projectquality. To signal project quality, firms with broad-basedincentives capitalize a higher proportion of R&D costs thansubsidized firms. We also find that combining broad-basedincentives and subsidies might not create synergies.