The efficiency of corporate R&D investments: Information‐sharing and government subsidies

We compare the impact of broad‐based equity incentives and government R&D subsidies on the efficiency of corporate innovation. Chinese corporations that offer broad‐based incentives for employees and managers demonstrate greater R&D investment efficiency, as evidenced by a higher ratio of innovation outputs to cost allocation. Conversely, firms receiving government R&D subsidies demonstrate lower efficiency. Accounting for endogenous treatments in a multi‐treatment framework, we suggest an information‐sharing environment is critical for efficient capital allocation. Government agencies will likely provide subsidies based on information different from what firm headquarters might have, while broad‐based incentive programs encourage employee coordination, enhancing efficiency and project quality. To signal project quality, firms with broad‐based incentives capitalize a higher proportion of R&D costs than subsidized firms. We also find that combining broad‐based incentives and subsidies might not create synergies.