R&D Subsidies and Radical Innovation: Innovative Mindset and Competition Matter

With the increasing focus on R&D (research and development) subsidies of various researchers, there is growing interest in how these subsidies affect radical innovation. Based on the limited attention paid to this area in the existing literature, this paper investigates the impact of R&D subsidies on radical innovation. Using a sample of Chinese listed firms, we investigate how innovation orientation and competitive intensity moderate this relationship. By incorporating concepts from Path Dependence Theory, we propose that R&D subsidies alter firms’ assessment of the value and risk associated with investments in radical innovation, influencing their innovation strategies. Subsidies may increase the attractiveness of incremental innovations, which have lower volatility and faster returns, compared to radical innovations, which inherently involve higher risk and uncertainty. Based on the results of our analysis, we find that R&D subsidies negatively affect radical innovation, but firms with a stronger innovation orientation (which reflects their greater tolerance for risk) are less negatively affected. Conversely, an increase in the intensity of competition exacerbates the negative impact of subsidies because it induces firms to make safer incremental investments. The robustness analysis confirms that the main effects remain significant even when using alternative proxies for innovation. Our study sheds light on the mechanisms affecting the effectiveness of subsidies from the perspective of finance theory and highlights the conditions under which subsidies may unintentionally discourage radical innovation.