Each year governments worldwide spend an enormous amount of money subsidising businesses; researching the relationship between the allocation of government subsidies and total productivity for Chinese listed firms

China does not pick – or create – winners when giving subsidies to firms. Lee Branstetter, Guangwei Li,Mengjia Ren. CEPR, Mar 9 2023. https://cepr.org/voxeu/columns/china-does-not-pick-or-create-winners-when-giving-subsidies-firms

Abstract: Each year governments worldwide spend an enormous amount of money subsidising businesses. This column investigates the relationship between the allocation of government subsidies and total productivity for Chinese listed firms. The authors find little evidence that the Chinese government consistently ‘picks winners’. Firms’ ex-ante productivity is negatively correlated with subsidies received by firms, and subsidies appear to have a negative impact on firms’ ex-post productivity growth.

We conduct a two-stage analysis. In the first stage, we estimate standard Cobb-Douglas production functions separately by industry, and compute total factor productivity (TFP) for each firm in each year. In the second stage, we seek to understand the relationship between government subsidies and estimated TFP, using a number of different regression approaches.

Our analysis provides no evidence that the Chinese government consistently ‘picks winners’. There appears to be a statistically significant negative correlation between subsidies and TFP, and a robust positive correlation between subsidies and firm size (as measured by the firm's total assets) and between subsidies and net profit. These results indicate that, overall, subsidies are given to larger and more profitable, but less productive firms.

We also find little evidence that receiving a subsidy is correlated with subsequent growth in TFP. When we aggregate across subsidy types, total subsidies appear to have a statistically significant negative impact on subsequent TFP growth. When we disaggregate across subsidy types, we find that even subsidies given out in the name of R&D and innovation promotion or industrial and equipment upgrading have no measured, statistically significant positive effect on firms’ productivity growth.

On the other hand, receiving a subsidy does seem to be correlated with an increase in firms’ employment. When we aggregate across subsidy types, we find that current subsidies appear to have a positive impact on current employment levels, while the prior year’s subsidies seem to have a negative impact on current employment, potentially indicating that firms might be strategically manipulating employment numbers to get subsidies. In other words, firms are temporarily increasing hiring during the period when they receive subsidies, then cut back on employment during the next period. This is consistent with the view that political considerations might outweigh efficiency considerations in the allocation of direct subsidies in China.