Do Selective R&D incentives from the Government promote substantive innovation? Evidence from Shanghai technological enterprises

Some types of government R&D incentives, such as subsidies and the High-and-New Technology Enterprise (HNTE) programme in China, are considered selective because they are given to few eligible firms. The selection process necessitates firm signalling and thus may influence R&D activities before the policy takes effect. This paper explores the innovation behaviour of firms in both the period of preparing to apply for the incentives (application period) and the period after obtaining the incentives (execution period). The empirical results show that subsidy programmes can effectively encourage firms to carry out substantive innovation, while HNTE programme stimulates deceptive innovation in the application period and suppresses innovation motivation in the execution period. This result implies that the HNTE programme fails, at least in the short run, to drive substantive innovation. Comparison of the two policies also shows that information gathering and inspection may reduce firm deviation.