Financial subsidies, tax incentives and technological innovation in China's integrated circuit industry

The integrated circuit (IC) industry's role in promoting sustained economic growth makes it highly valued by governments worldwide. Based on the late-mover advantage and market failure theories, this study demonstrates the importance of government intervention in industrial technological innovation. This study uses panel data from 81 A-share listed integrated circuit companies in China for 2011-2019 to analyze the effects and differences between the two most widely used policy tools, financial subsidies and tax incentives. The conclusion shows that financial subsidies inhibit technological innovation in the integrated circuit industry, while the promotion effect of tax incentives is weak. The robustness test also supported this conclusion. Further analysis shows that industry heterogeneity affects both policy tools. In terms of branches of the industrial chain, the policy effect of the core link is more significant than that of the support link. The inhibitory effect of financial subsidies is more obvious in the Pearl River Delta region, and the promotional effect of tax incentives is more pronounced outside the Pearl River Delta region. In addition, the current fiscal decentralization will hinder the promotion effect of the policy, and market competition will enhance the promotion effect of the policy. On the one hand, the research in this paper provides empirical evidence and policy reference for China to optimize fiscal policies related to the integrated circuit industry. On the other hand, a reference for development paths for late-mover countries is also provided in the early stage of industrialization.