Can public R&D subsidy facilitate firms’ exploratory innovation? The heterogeneous effects between central and local subsidy programs

Public R&D subsidy is a commonly adopted policy instrument to promote firms’ exploratory innovation that encourages novel knowledge learning. Under the multi-level institutional settings such as China, however, it is unclear in current literature as to whether central and local-level governmental R&D subsidy programs exert heterogeneous influences on recipient firms’ exploratory innovation. By employing an exclusive panel data of manufacturing firms in Jiangsu Province, this study investigates the heterogeneous effects of central and local R&D subsidies on firms’ exploratory innovation. Considering that regional innovation contexts may influence the learning and innovation of subsidy recipients, we further test the interaction effects of specialized industrial agglomeration and R&D subsidies. We find that R&D subsidies in general do promote firms’ exploratory innovation, and the local R&D subsidy exhibits a more salient effect. In addition, the positive effect of subsidies is stronger for the recipients in a highly specialized industrial agglomeration. This study contributes to R&D subsidy literature and extends our knowledge on the different roles of central and local governments in firms’ learning behaviors and technological upgrading.