Misuse of R&D Subsidies in China


ZEW Economists Professor Bettina Peters and Dr. Philipp Boeing in the #ZEWPodcast

China grants Chinese companies extensive subsidies for their R&D activities. A considerable part of these funds is used for other purposes.

China aims to become the world’s leading nation in innovation and technology by 2050. Research and development (R&D) are crucial for achieving this goal. Therefore, the government grants Chinese companies extensive subsidies for their R&D activities. However, these funds are not always used for the intended research purposes. In the latest episode of  the #ZEWPodcast ‘Wirtschaft · Forschung · Debatten’/‘Economy · Research · Debates’, Professor Bettina Peters, deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and Dr. Philipp Boeing, ZEW innovation economist and China expert, talk about the misappropriation of R&D subsidies in China.

China is striving for economic growth. How this is to be achieved is set out in the Chinese government’s recently issued 14th Five-Year Plan. “One of the priorities from 2021 to 2025 is to stimulate productivity through innovation,” says Philip Boeing in the latest episode of the #ZEWPodcast. Currently, there is still much room for optimisation, as China’s productivity level is roughly one third of the US level. China aims to close this gap through R&D subsidies to become less dependent on foreign technology suppliers in the future.

Approximately half of all subsidy payments are misused

In their study, Peters and Boeing analysed the efficiency of R&D subsidies in China in recent years. “Misappropriation has decreased considerably since the introduction of the Mid- to Long-Term Plan for Science and Technology Development in 2006. Still, around one in five companies misappropriates subsidies,” says Peters, explaining the research findings. The researchers also found that Chinese companies spend about half of the R&D subsidy funds on non-research purposes, e.g. machines and production equipment.

The government is trying to stop misappropriation by introducing stricter sanctions and “live monitoring of administration in companies”. Despite systematic control, the misappropriation of subsidies remains a pressing issue in China. The ZEW economists refer to a recent case in which a well-known Wuhan company that manufactures semiconductors misappropriated two billion euros in subsidies it had received.