| Abstract | Since the outbreak of the global financial crisis in 2008, the Chinese economy has faced the dual challenge of slowing growth and rising systemic risks. On the one hand, China's economic growth is facing a cyclical and structural decline due to the adverse impact of international demand and the constraints of domestic labor, resources and the environment. On the other hand, in the process of the economy shifting from high-speed growth to medium-to-high-speed growth, the leverage of non-financial corporate sectors has risen sharply, increasing China’s systemic financial risks. In 2017, the 19th National Congress of the Communist Party of China proposed that “innovation is the first driving force for development”. With the non-competitive and incomplete exclusive attributes of quasi-public goods, R&D has positive externalities, prone to lead to free-riding behavior and resulting in lower R&D investment of corporate than the optimal level of society. Subsidies can compensate for market failures in corporate innovation. During the period of 2001-2017, the proportion of government R&D subsidies and the growth rate of China's GDP changed in the same direction, but there was a negative relationship between the former and the industrial enterprise leverage. How to explain the causal effects of government R&D subsidies on economic growth and corporate leverage? What is its inherent economic logic?
To answer the above questions, this paper establishes a dynamic stochastic general equilibrium model with endogenous technological progress. Different from the traditional dynamic general equilibrium model, the enterprise in our model is an independent economic entity, self-governing and responsibility for its profit and loss, and makes contact with other sectors through capital markets, factor markets and taxation. In order to make the model closer to reality and the leverage of companies endogenous, we assume that the funds required for corporate investment comes from its own operating profit and issued bonds, while the company faces debt constraints.
The results show that in the long run, there is an “inverted U” relationship between the proportion of government R&D subsidies in total fiscal expenditure and economic growth, and a “U” relationship between the former and corporate leverage. Moreover, as technology intensity rises, the long-term basic relationships between the proportion of government R&D subsidies and the two variables, namely economic growth and corporate leverage, are both not affected, but the optimal proportion of government R&D subsidies will increase. In the short term, rising government R&D subsidies will raise output and reduce enterprise leverage, and expand its impact on the latter two as technology intensity increases. In addition, government subsidies will increase the demand for R&D human capital and reduce the general human capital, which may lead to a widening income gap between the two groups of people.
Compared with the existing literature, this paper has three marginal contributions. First of all, based upon the new era that the Chinese economy shifts from high-speed growth to high-quality development and achieves new and old motive force conversion, it investigates how the government R&D subsidies, a public policy widely implemented at home and abroad, to affect China's economic growth and corporate leverage by the channel of technological advance, which enriches the research in the field of research and development subsidies. Secondly, in a dynamic stochastic general equilibrium framework with endogenous technological progress, it comprehensively analyze the long- and short-term effects of government R&D subsidies on economic growth and corporate leverage, which effectively overcomes the endogenous problem, the relationship between enterprise leverage and economic growth in previous empirical studies. Endogenous problems that cannot be avoided. Finally, under the different importance of technological progress to economic growth, it analyzes the heterogeneous impacts of government subsidy policy on economic growth, corporate leverage, and the additional income gap in detail, thus providing important inference for the government to better implement innovative policies, such as R&D subsidies, to achieve the dual goals of “steady growth” and “anti-risk”.
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