| Abstract | Can government subsidy stimulate firms’ new product innovation? It is an important dimension for evaluating the effect of government subsidy. Based on the firm-level micro data of China from 1998 to 2007, this paper combines propensity score matching with difference-in-difference and survival analysis to systematically evaluate the micro effect of government subsidy on firms’ new product innovation. The empirical study shows that, only moderate subsidy stimulates firms’ new product innovation significantly, while high degree subsidy suppresses firms’ new product innovation. The mediating effect analysis shows that, “subsidy-seeking” investment is an important channel for why high degree subsidy suppressing firms’ new product innovation. We further investigate the impacts of intellectual property insurance on subsidy’s innovation effect, the results show that, the effect of government subsidy on firms’ new product innovation is more pronounced in regions with good intellectual property insurance intuitions. Finally, we employ survival analysis method to investigate the effect of government subsidy on firms’ duration of new product innovation, and find that government subsidy helps firms to increase the duration of innovation as a whole, which is mainly for moderate subsidy, while high degree subsidy tends to shorten the duration of innovation. This paper provides a new perspective to understand Chinese manufacturing firms’ innovation activity, and it also provides some micro evidence for objectively evaluating the effect of Chinese government subsidy and improving the design of subsidy policy. |