For More Effective Innovation: The Complementary Role of the Market for Ideas in Government Subsidizing Innovation
Description
The role of government subsidies in improving innovation efficiency has long been questioned. Due to information asymmetry, a lot of resource misallocation may exist in the process of government compensating for the externalities of innovation. Few studies have focused on the complementary role the Market for Ideas (MFI) plays in allocating innovation resources to governmental actions. Against this background, this study discusses the effects of government subsidies on the innovation efficiency and the effects of MFI on government subsidies, and then analyzes the effects of government subsidies and the MFI on the efficiency of knowledge innovation and product innovation, respectively. An empirical study that takes a panel data for China covering 30 provinces over the period from 2003 to 2022 and applies the threshold model is also carried out to test the conclusions from theoretical analysis. This study produces two findings: First, government subsidies can always promote the efficiency of knowledge innovation however well the MFI develops. The better the MFI works, the stronger promotion the government subsidies give to play. Second, the absence of market mechanism may lead to the misallocation of government subsidies when the MFI is underdeveloped, hence restricting the efficiency of product innovation featured with novel products and services. However, government subsidies will improve the efficiency of product innovation once the developed MFI is formed.