Fact of the Week: Following China's Anti-Corruption Campaign, Highly Productive Firms Received 44 Percent More R&D Subsidies

October 9, 2018

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Following China’s 2012 anti-corruption campaign, highly productive firms received 44 percent more R&D subsidies.

Source: Lily Fang et al., “Corruption, Government Subsidies, and Innovation: Evidence from China,” September 2018, NBER Working Paper 25098.

Commentary: The Chinese government funds an exceptionally large amount of R&D, with direct government subsidies accounting for a quarter of the country’s total R&D spending in 2015. As such, how well the government allocates those funds plays an outsized role in determining how innovative the nation can be. China has done this poorly historically, but a new study indicates that recent efforts to improve have been successful.

In 2012, the Chinese government initiated an anti-corruption campaign which has led to the prosecution of more than 100,000 officials. In the years leading up to the campaign, firms with below-average R&D efficiency—a measure of output produced from resources invested—actually received more R&D subsidies than above-average firms. This has been reversed due to a 44 percent increase in subsidies for efficient firms, compared to a 6 percent increase for inefficient firms. The effect was largest for firms overseen by officials who were removed, where efficient firms saw their subsidies grow by 184 percent.