The more subsidies, the longer survival? Evidence from Chinese manufacturing firms

• Author: Qilin Mao,Jiayun Xu
• Published date: 01 May 2018
• DOI: http://doi.org/10.1111/rode.12361
• Date: 01 May 2018

REGULAR ARTICLE

The more subsidies, the longer survival? Evidence

from Chinese manufacturing firms

Qilin Mao

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Jiayun Xu

2

1

Institute of International Economics,

Collaborative Innovation Center for

China Economy, Nankai University,

Tianjin, China

2

Asia–Pacific Economic Cooperation

(APEC) Study Center, Collaborative

Innovation Center for China Economy,

Nankai University, Tianjin, China

Correspondence

Jiayun Xu, APEC Study Center, Nankai

University, No. 94, Weijin Road, Nankai,

Tianjin 30071, P. R. China.

Email: xujiayun321@mail.tsinghua.edu.cn

Funding Information

Special Program of Talents Development

for Excellent Youth Scholars in Tianjin,

National Natural Science Foundation of

China (Grant No. 71403135, 71773055)

and Major Projects of the National Social

Science Foundation of China (Grant No.

15ZDA057).

Humanities and Social Science of

Ministry of Education of the People’s

Republic of China (Grant No.

16YJC790114), and China Postdoctoral

Science Special Foundation (Grant No.

2017T100056).

Abstract

How do government subsidies affect firm survival? By

using Chinese firm-level data for 1998 to 2007, we show

that, on average, there is a positive and significant impact

of government subsidies on firm survival. We also inves-

tigate the heterogeneous effects of government subsidies

with different intensities on firm survival, and find that

moderate-intensity government subsidies exert a positive

impact on firm survival, while high-intensity government

subsidies increase the exit probabilities, the underlying

mechanisms via subsidy-seeking investment and innova-

tion incentive weakening are supported by empirical evi-

dence. Furthermore, we explore the role of governance

institutions in the subsidy–survival relationship, and find

that the positive impact of government subsidies on firm

survival is more pronounced in regions with better gover-

nance institutions.

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INTRODUCTION

The ability of survival is crucial for any enterprise, and it is also the focus of governments, as

maintaining a higher level of employment and fostering a healthy and nurturing environment for

domestic enterprises are high on any government’s policy agenda (Wang, 2013). To this end,

DOI: 10.1111/rode.12361

Rev Dev Econ. 2018;22:685–705. wileyonlinelibrary.com/journal/rode ©2017 John Wiley & Sons Ltd

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many governments around the world provide a variety of subsidies to manufacturing firms. Taking

China for instance, central government and local government have introduced many support poli-

cies to promote the growth of enterprises since 2000, and as a result, the number of subsidized

firms as well as the amount of subsidy are increasing year by year.

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The aim of this paper is to

evaluate the impact of Chinese government subsidies on firm survival.

This paper is related to several strands of literature. The first related strand of the literature is

research on firm survival. The earlier studies focus predominately on the influence of firm size on

firm survival (e.g., Audretsch, Santarelli, & Vivarelli, 1999; Agarwal & Audretsch, 2001) and

show that the larger the initial size of enterprise, the longer the duration of the enterprise will be.

Later, much research investigates the relationship between ownership structure and firm survival,

but the conclusions are rather mixed. For instance, P

erez, Llopis, and Llopis (2004) and Van Bev-

eren (2007) find that foreign enterprises are more likely to exit from the market compared with

domestic enterprises; yet Colombo and Delmastro (2000) as well as Baldwin and Yan (2011)

forcefully argue that foreign enterprises survive longer than domestic enterprises. Furthermore,

Fontana and Nesta (2009) empirically study the relationship between product innovation and firm

survival for a sample of 121 firms in a high-tech industry, they demonstrate that location near the

technological frontier is an important determinant of firm survival, and R&D efforts tend to

increase the probability of survival. Wang (2013) studies the relationship between FDI and Cana-

dian domestic firm survival, and finds a net positive impact of FDI on domestic firm survival.

Furthermore, some researchers are also interested in the relationship between government subsi-

dies and firm survival (see, e.g., Battistin, Gavosto, & Rettore, 2001; Oh, Lee, Heshmati, & Choi,

2009; Desiage, Duhautois, & Redor, 2010). Battistin et al. (2001), for instance, investigate the

impact of Italian program promoting youth entrepreneurship on firm survival, and find that the

subsidized firms do not survive longer than spontaneous firms if one takes the start-up advantage

into account. Using South Korean firm-level data over the period 2000 to 2003, Oh et al. (2009)

investigate the effects of the credit guarantee policy on firm performance, they show that credit

guarantees significantly increase firm survival rate and employment while have no impact on firm

investment and productivity growth. More recently, Desiage et al. (2010) study the impact of pub-

lic subsidies on French new firm survival, their results indicate that subsidized firms survive longer

than nonsubsidized firms, and bank loans help to increase the probability of survival whether the

firms are subsidized or not. Obviously, the evidence on the relationship between government subsi-

dies and firm survival are mixed, more importantly, none of them directly touches on whether gov-

ernment subsidies with different intensities affect firm survival differently, which is one of the

main focuses of the present study.

In this paper, we use annual firm survey data set from the National Bureau of Statistics of

China over the period 1998 to 2007 to investigate the impact of government subsidies on firm sur-

vival. To the best of our knowledge, this is the first paper to investigate how firm survival

responds to government subsidies in the context of China, the world’s largest developing country.

In addition, our study has the following unique features. First, the current paper adopts a novel

methodology to investigate empirically the impact of government subsidies on the survival of Chi-

nese firms. In particular, we first use the propensity score matching technique to address the issue

of sample selection bias, and then adopt the discrete-time cloglog hazard model to examine the

nexus between government subsidies and firm survival based on the matched sample. Second, this

paper not only analyzes the average impact of government subsidies on firm survival, but also

examines the heterogeneous effects of government subsidies with different intensities, and in addi-

tion, we further explore the possible mechanisms through which high-intensity government subsi-

dies affect firm survival. Last, but not least, note that the quality of governance institutions differs

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MAO AND XU