External Finance or Government Subsidy? Evaluating the Impact ofMultiple-Funds on High-Tech SMEs’ Innovation in Shandong Province,China

Abstract

This paper addresses the challenge of evaluating the influence of external finance and government subsidies on innovation in high-tech SMEs, within a financial policy-driven context in China. Using a firm-level panel dataset from 2011 to 2020, we aim to shed light on this issue. Our results show that both types of funding positively impact high-tech SMEs’ innovation, and government subsidies can strengthen the positive impact of external finance on high-tech firms’ innovation. We also find that private firms’ innovation benefits more from external financing than state-owned firms. Furthermore, an additional analysis of in-depth interviews with policy-makers, about the impact of fiscal policy in Shandong province in China, enhance the validity and generalizability of our findings. Our study reveals that government subsidies play an active monitoring role by providing insurance to firm managers against innovation failures and providing new insights to both policy-makers and firm managers.