The Effect of Government Subsidies on Private R&D Expenditure: --Evidence from Zhejiang Province of China

China government has implemented some schemes of public funds in order to increase R&D intensity of private firms. This study analyzes the effects of public R&D schemes on the innovation activities of private firms in Zhejiang Province of China. The main question in this paper is whether government subsidies to Private R&D stimulate R&D activities or simply crowd out privately financed R&D. Empirically, we investigate the average causal effects of all government subsidies in Zhejiang Province of China using Propensity Score Matching. In order to account for possible selectivity bias, and to improve comparability of firms, two different versions of matching approach are employed. The Nearest neighbor estimator is preferred to the Kernel estimator. The results show that government R&D subsidies do not have a significant effect on R&D expenditures of private firms.