Externalities of government-oriented support for innovation: Evidence from the national innovative city pilot policy in China

A significant body of literature has investigated the direct effects of government-oriented support for innovation on targeted firms. However, little is known about the externalities of innovation-supporting policies on non-targeted firms’ innovation performance. Theoretically, innovation-supporting policies may generate positive externalities through knowledge spillover effects but may also lead to negative externalities due to the policy-driven transfer of innovation resources. By using the national innovative city (NIC) pilot policy in China as a quasi-natural experiment and employing the difference-in-difference approach, we find that the NIC pilot policy generates positive intra-province externalities on the patent outputs of non-targeted firms via knowledge spillovers, consistent with positive externalities argument. Furthermore, we discover that geographical proximity, cultural proximity, coordinated economic development among cities and less market competition significantly enhance the positive intra-province externalities. From the perspective of externality, our findings further clarify the roles of government support for innovation activities.