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How does progressive subsidy reduction affect the innovation and economic performance of new energy vehicle firms?

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  • Wang, Feng
  • Han, Huadan

Abstract

Effective subsidy withdrawal methods are important to minimize the adverse effects of such withdrawal on the industries supported by these subsidies. China adopted the progressive subsidy reduction policy (PSRP) for the new energy vehicle (NEV) industry in 2017. We examine how this policy impacts the innovation and economic performance of NEV firms (NEVFs). We first build a theoretical model to explore the evolution of the intrinsic relationship between NEVFs’ innovation and their economic performance. Then, we exploit the PSRP's implementation as a quasi-natural experiment, and examine its effects on the NEVFs’ innovation and economic performance based on Chinese listed firm data from 2015 to 2021. We find that the PSRP encourages NEVFs to improve innovation, but harms their economic performance in the short run. Furthermore, the PSRP promotes the innovation of firms in the growth and mature stages, original equipment manufacturers, and state-owned enterprises (SOEs), but does not affect their economic performance. Finally, the PSRP fails to improve the innovation of firms in the decline stage, component manufacturers, and non-SOEs, and worsens their economic performance. These findings provide valuable insights for governments on designing subsidy reduction policies and corresponding coping strategies for firms.

Suggested Citation

  • Wang, Feng & Han, Huadan, 2024. "How does progressive subsidy reduction affect the innovation and economic performance of new energy vehicle firms?," Economic Analysis and Policy, Elsevier, vol. 84(C), pages 1621-1635.
    • Handle: RePEc:eee:ecanpo:v:84:y:2024:i:c:p:1621-1635
    DOI: 10.1016/j.eap.2024.10.050
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