Government subsidies, ownership structure and operating performance of state-owned enterprises: evidence from China

Government subsidies have been used as a policy tool by many countries. Given the importance of government subsidies in the context of Chinese economy and state-owned enterprises (SOEs), this study seeks to understand the role played by government subsidies in the operating performance of Chinese SOEs. Using panel data on Chinese SOEs to construct the fixed-effects regression models, this study examines the effects of government subsidies and explores the moderating role of ownership structure in the correlation between government subsidies and operating performance of SOEs. Government subsidies have improved the operating performance of SOEs through easing financial constraints and stimulating research investment. However, high proportion of state-owned shares is not conducive to the positive effect of subsidies. The heterogeneous analyzes show, for SOEs located in eastern China, at the local level or with a higher R&D level, an increase in state-owned shares is more detrimental to the positive effect of subsidies on their performance. Tax-based-subsidies have significantly positive effect on the operating performance of SOEs, with the state-owned shares exerting a negative moderating effect on this positive correlation. Based on the empirical findings, we propose some policy suggestions for the mixed ownership reform of Chinese SOEs and reasonable allocation of government subsidies.