Government Subsidies, Market Power, and Firm Performance in China’s Manufacturing Sector: The Mediating Role of Innovation

This study examines the effects of government subsidies and market power on firm performance in China’s manufacturing sector, focusing on the mediating role of patent-based innovation. Using panel data from 454 listed electronics firms over a ten-year period, multiple regression analysis is used to test direct and mediation effects. The results show that both government subsidies and market power positively influence firm performance. We also identify an inverted U-shaped relationship between market power and patent activity, supporting the view that moderate competition fosters innovation, while excessive competition suppresses it. Furthermore, patent activity significantly mediates the effect of subsidies on performance, indicating that subsidies enhance firm outcomes primarily by stimulating innovation. In contrast, patent activity does not mediate the competition–performance link, suggesting that innovation driven by competition does not immediately translate into financial gains. This study contributes to ongoing debates about the balance between market forces and state support in fostering innovation-driven growth, also contributes to the resource-based and industrial organization literature. These insights hold practical value for policymakers and managers alike, while also enriching theoretical perspectives on the interaction between resources, capabilities, and institutional environments in emerging economies.