Government R & D Subsidies, Political Relations and Technological SMEs Innovation Transformation

doi:10.4236/ib.2013.53B022

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iBusiness, 2013, 5, 104-109

http://dx.doi.org/10.4236/ib.2013.53B022 Published Online September 2013 (http://www.scirp.org/journal/ib)

Government R & D Subsidies, Political Relations and

Technological SMEs Innovation Transformation

Feifei Yu

Business School of Hohai University, Nanjing, China.

Email: yufeifeih [email protected]

Received July, 2013

ABSTRACT

This paper studies the effect of government research and development (R&D) subsidies and political relations on the

innovative activities of techno logical small and medium-sized enterprises (SMEs). Moreov er, the tech nolog y innov ation

path of SMEs is an important issue related to government R&D subsidies. This paper explores these effects using mul-

tiple case studies. Through case analyses of four biological pharmaceutical enterprises, we found that first, technologi-

cal SMEs that receive a significant amount of government R&D subsidies will transform from exploitative innovation

to explorative innovation in a short amount of time, whereas technological SMEs that receive less government R&D

subsidies will perform less innovative activities over a long time. Second, technological SMEs with strong political re-

lations tend to do more explorative innovation, whereas technological SMEs with weak political relations tend to do

more exploitative innovation . Third, technological SMEs with strong po litical relations will promote the positive effect

of government R&D subsid ies on their innovation performance.

Keywords: Government R&D Subsidies; Technological SMEs; Technological Innov a tion; Political Relations

1. Introduction

As the main force behind national innovation , tech no logy

innovation is an important contributor to sustainable de-

velopment for technological small and medium-sized

enterprises (SMEs). However, due to the limitations of

scale, lack of resources, and relationships with other en-

terprises or government departments that are neither

close nor stable, technological SMEs need to leverage the

support of govern ment departments in the innov ation and

development process. Since 2008, technological SME

clusters have collapsed in some provinces in China due

to the financial crisis. Therefore, the State Ministry of

Science and Technology, Department of Small and Me-

dium-sized Enterprises, Provincial Department of Sci-

ence and Technology, and other relevant government

departments have introduced a variety of supporting

policies to increase the different levels of innovation

funds and technology projects for technological SMEs.

Thus, how government R&D subsidies affect the R&D

activities of technological SMEs as well as the shift of

the technological innovation path is an important issue

related to the government-sponsored effect and techno-

logical innovation activities.

In exploring the effect of government subsidies on the

self-R&D of enterprises, foreign scholars remain skepti-

cal of these relations. Several representative viewpoints

can be used. First, government subsidies stimulate enter-

prises self-R&D by enterprises. For example, according

to the data on Israeli manufacturing enterprises in the

1990s, Saul (2002)[1] reported that funds from the Min-

istry of Industry and Trade promote long-term R&D in-

vestment. Feldman and Kelley (2006)[2] also revealed

that enterprises that received government subsidies were

more willing to cooperate with others, and funded enter-

prises tend to obtain other sources of funding compared

to others th at have not yet been funded. Moreover, Koga

(2005)[3] verified that government R&D subsidies sup-

plement self-R&D investment based on data from 223

Japanese high-tech entrepreneurial enterprises. Second,

government R&D subsidies have crowding-out effects on

the enterprises self-R&D investment (Goolsbee, 1998[4];

Kelette, Moen, & Grilichesz, 2000[5]).

Third, no causal relations exist between government

R&D subsidies and self-R&D investment. For example,

Wallsten (2000)[6] asserted that government R&D sub-

sidies are associated with R&D investment, but could not

prove a causal relationship between the two. He also ar-

gued that the more people enterprises employed, the

more R&D activities they performed to win more gov-

ernment R&D subsidies.

In recent years, the government attached great impor-

tance to technical innovation and increased government

subsidies, and domestic scholars began to pay attention

Government R & D Subsidies, Political Relations and Technological SMEs Innovation Transformation 105

to this issue. In addition, Gao (2011; 2012 ) demonstrated

the influence of different stages of the enterprise life cy-

cle on government R&D subsidies for technological

SMEs. Most domestic scholars studied large- and me-

dium-sized enterprises, demonstrating the relationship

between Chinese government R&D subsidies and self-

R&D investment of large and medium-sized enterprises

utilizing regional statistical data from a macro level (Li

Ping, 2010; Wang Chunhui, Cheng Hua, Zhao Xiang,

2009; Cheng Hua, 2008).

In existing research, domestic studies mostly concen-

trated on the macro level and descriptive illustration,

which lack data from an enterprise perspective. Thus, the

relevance to technological SMEs was low. Meanwhile,

foreign research focused on the relationship between

government R&D subsidies and self-R&D investment

from the economics theory background of market failure,

and few studies on the effect of government R&D subsi-

dies on the specific activities of enterprise technological

innovation are available.

In summary, this paper studies Chinese technological

SMEs and explores the effects of government R&D sub-

sidies on the technological innovation path of SMEs,

which supplements current domestic and foreign research.

This paper is structured as follows: First, we review the

relevant literature and put forward three propositions.

Then, we introd uce research an d design d etails, in cluding

the case study method, the selection of cases, and four

basic case descriptions. Cross-case analysis on four en-

terprises selected from biological medicine industry is

also included. Finally, we summarize the research con-

clusion and the limitations of the paper.

2. Literature Review and Propositions

2.1. Government Subsidies Funding Effect:

Behavioral Additionality

Aside from the effect of government R&D subsidies on

R&D investment and innovation performance, Buisseret

et al. (1995)[7] advocated to understand its additionality

from a broader sense and recommended the inclusion of

the changes in enterprises innovation activities and tech-

nology innovation strategy when estimating the spillover

effects of government subsidies. Behavior additionality

brought by government R&D subsidies refers to corpo-

rate successor management behavior change after ob-

taining government R&D subsidies (Davenport et al.,

1998)[8]. Behavior additionality revealed most of the

changes in enterprises behaviors in the R&D process.

Several foreign scholars have also pointed out that

government R&D subsidies could accelerate the project

process, promote the expansion of scale and scope of the

project, and encourage enterprises to undertake more

challenging research projects. For example, Hsu, Horng,

and Hsueh (2009)[9] explored the effect of government

R&D subsidies on the strategic change of R&D behavior

of the recipients, and reported that enterprises sponsored

would increase project investment, strengthen strategic

implementation, reduce cost, and stimulate commerciali-

zation. Therefore, similar to small-scale SMEs with scar-

city of R&D resources, technological SMEs funded by

government R&D subsidies also have innovative behav-

ior additionality. Th erefore, we propose:

Proposition 1: Different types and strengths of gov-

ernment R&D subsidies will influence the innovation

path of technological SMEs.

2.2. Effect of Political Relations on Technological

Innovation: Social Capital Perspective

Although similar in size and industrial characteristics, th e

differences of technological SMEs in terms of foundation

and background are evident. For example, in terms of

ownership, technological SMEs have a variety of forms,

such as state-owned, joint ventures, and private. Based

on their founding background, some SMEs were devel-

oped from family enterprises, some were reformed from

school-run enterprises, and some were established by

several professional technical personnel. Thus, techno-

logical SMEs with different foundations and back-

grounds will cause enterprises to have different political

relations, which affect the direction and specific path of

technological innovation.

Social capital is extremely important for enterprise

development and innovation due to the small scale of

SMEs. Several studies support the opinion that entrepre-

neurs’ social relations have a po sitive influence on enter-

prise innovation activities. For example, Zou and Ni

(2010) revealed that the political relations of managers

positively influence innovation performance through

organizational learning. However, private entrepreneurs’

political relational capital has a significantly negative

effect on enterprises’ R&D investment tendency and in-

tensity. Thus, other researchers demonstrated an opposite

viewpoint. For example, Chen (2012) suggested that pri-

vate entrepreneurs’ political relations and association

relations had a significantly negative effect on their R&D

investment intensity.

Political relations are not only an important factor for

enterprises technological innovation, but also an impor-

tant resource. Most scholars believe that a positive rela-

tionship exists between political relations and technical

innovation, such as Wang, Su, and Chen (2011). How-

ever, some scholars hold the opposite view, such as Liu

and Yang (2012).

Compared to private enterprises without political as-

sociation, private enterprises with political association

have less R&D investment based on the data of 101 pri-

vate corporations with R&D expenditure report disclo-

Government R & D Subsidies, Political Relations and Technological SMEs Innovation Transformation

106

sures from the Shenzhen SME board. Moreover, Liang,

Li, and Guo (2011) revealed that the informal system

protection effect of innovation has a significant differ-

ence according to different enterprise technology intensi-

ties. In addition, some scholars study the mechanism of

the effect of current political relations on enterprise in-

novation performance. Zeng and Song (2011) argued that

political connections do not have a direct effect on inno-

vation performance through an empirical study, indi-

rectly improving performance through intermediary

variables of organizational learning and dynamic capa-

bilities.

Based on the above studies, this paper proposes the

following:

Proposition 2: The political relations of technological

SMEs will affect the selection of their innovation path.

Proposition 3: The political relations of technological

SMEs will strengthen the effect of government R&D

subsidies on thei r tech nology innovatio n performa nce.

3. Cross-Case Analysis

3.1. Government R&D Subsidies and Innovation

Path Selection

The differences between explorative innovation and ex-

ploitative innovation lie in the innovation bases, innova-

tive product, market development, and the source of in-

novation. Through case analysis, we found that techno-

logical SMEs that received more government R&D sub-

sidies will transform from exploitative innovation to ex-

plorative innovation in a relatively shor t period of time.

Among the four case enterprises, S company is the one

that obtained the largest amount of government R&D

subsidies. S company is a market-oriented R&D innova-

tion enterprise. Since being listed in 2004, the R&D in-

tensity of S company reached more than 10%. The com-

pany gave much importance to continuously developing

new products. R&D investment increased yearly, and the

proportion of R&D cost remained at 15% in nearly three

years, which was the same as the R&D investment of

multinational pharmaceutical companies. From 2004 to

2005, S company was funded approximately one million

Yuan by government R&D subsidies. After 2007, S

company’s research project received national support,

and government R&D subsidies rapidly grew to 8.58

million Yuan. In 2010, the received fund was approxi-

mately 37.15 million Yuan from 24 funds to reach the

high peak.

During listing in 2005, S company extensively devel-

oped existing projects and focused on a combination of

creation and imitation. In 2005, S company launched a

total of nearly 40 new drugs in three major categories

and refined company products, forming several product

lines with significant features.

Year 2007 is an important turning poin t for S company

in terms of technological inno va tion. S co mpan y adj usted

from a combination of imitation and creation to increase

the development of innovative drugs, which advocated

the steady move with blue ocean strategy through a focus

on high-end products and intellectual property. At the

same time, S company actively expanded to the interna-

tional market. In 2007 alone, S company completed ap-

plications for seven invention patents and obtained four

patent licenses. Since shifting from exploitative innova-

tion to explorative innovation in 2007, S company has

become actively involved in new frontiers and strength-

ened cooperation with domestic and foreign research

institutions to constantly develop innovative drugs with

huge potential in domestic and foreign markets. For ex-

ample, in April 2008, S company acquired RuiKang

Pharmaceutical Equity and signed a technology transfer

contract to strengthen cooperation in R&D and produc-

tion with domestic and foreign enterprises. In 2009, S

company invested 10.2 million Yuan to set up a joint

venture named Liaoning Maidi Technology Co. Ltd.,

which can extend the industrial chain to new fields, such

as vitro and clinical immunology, biochemistry diagnosis

reagent, biological treatment and clinical examination,

and medical service. In 2010, S company invested 10

million Yuan in Jiangyin Changfeng Medical Technol-

ogy Ltd. to strengthen its R&D capability in the field of

respiratory systems. In 2011, S company went out of the

country and began to pay attention to strengthening co-

operation with overseas pharmaceutical companies and

research institutions. To quickly enter the field of

high-end vaccines and monoclonal antibodies to broaden

its business scope, S company cooperated with Canada’s

Pnu Vax Incorporated to set up a joint venture company,

which mainly engaged in R&D for new vaccines and

antibody production and sales. To improve the com-

pany’s research capability and make full use of drugs

from International Research Institutes, S company in-

tended to set up a joint venture named DT with Lin Chai,

which engaged in R&D on diabetes prevention or treat-

ment drugs.

Second, technological SMEs that accessed less gov-

ernment R&D subsidies will remain in the exploitative

innovation over a long period of time, or will do less

innovative activities. Among the four case firms, H

company obtained the least government R&D subsidies

in nearly three years. Since being listed in 2006, the

R&D intensity of H company remained at 3% to 4%.

From 2006 to 2008, government R&D subsidies were

always below 2 million Yuan. In 2009, government R&D

subsidies remained below four million Yuan. In 2010,

government R&D subsidies had a breakthrough and

reached over seven million Yuan. Moreover, H company

authorized two patents in 2008 and another two patents

Government R & D Subsidies, Political Relations and Technological SMEs Innovation Transformation 107

in 2010.

Overall, the innovative results of H company were in-

significant, which remained in the initial stage of im-

proving management and innovation efficiency as well as

organizing the technological innovation department.

From 2006 to 2008, H company focused on improving

internal management, and its technological innovation

depended mainly on the combination of entrust research

and joint research. Since 2009, H company has started

cooperation with international pharmaceutical companies

and built related research institutions and an intellectual

property protection department. For example, H com-

pany cooperated with international pharmaceutical com-

panies and had two products that obtained COS and FDA

certifications in 2009. H company also set up techno-

logical subsidiaries in Shanghai and established an intel-

lectual property department.

3.2. Political Relations and Selection of

Technological Innovation Path

Political relations are special relations between enter-

prises and government or politicians, which are benefi-

cial for enterprises to obtain economic benefits from the

government. In this paper, we describe political relations

with each political association in three aspects: NPC

deputies and members, former government officials, and

industrial associations.

As a reformed school-run technological SME, D com-

pany is a leading bio-pharmaceutical high-tech enterprise

mainly operating with molecular diagnostic techniques.

D company is the only school-run enterprise listed in

Guangdong Province.

From the composition of board members in 2011, nine

people are on the board of directors; five of them have a

doctorate degree, two of them have an overseas educa-

tion background, and six of them have working experi-

ence in research institutes. Two of the board members

have political relations with the municipa l People’s Con-

gress, one of the board members once worked as a cadre

in the national government, and three of them served as

executive director of the national government, vice

president, or deputy secretary in industry associations.

Overall, D company has strong political relations.

Given its unique foundation and strong social back-

ground, D company was in an advantageous position in

research and application for molecular biology technol-

ogy, especially in gen e diagnosis technology. In the field

of fluorescent quantitative PCR detection, D company is

the undisputed pioneer and leader and has always fo-

cused on explorative innovation. From its technological

innovation develop ment, as early as in 1997, D company

first achieved the synthesis, labeling, and purification of

the core technology of fluorescence quantitative PCR. In

1999, D company independently studied hepatitis B virus

fluorescence detection kit, which received the first do-

mestic new drug certificate and production permit for

fluorescence quantitative PCR reagent products.

At present, D company’s annual research funds ac-

count for 10% of revenue, which reach the R&D input

level of a large international pharmaceutical company. D

Company has undertaken a number of national, provin-

cial, and ministerial level scientific research projects of

industrialization, and has a national research center

named Biological Engineering Technology Center of the

Ministry of Health and Medicine, which mainly studied

gene molecular diagnosis. From its innovative achieve-

ments, D company rapidly and successfully developed an

H1N1 influenza detection kit at the beginning of H1N1

influenza outbreaks, and was awarded 10 medical cer-

tificates from the State Food and Drug Administration

and obtained two invention patents from the National

Patent Bureau. In 2010, D company achieved 10 patents

of invention granted by the National Patent Office. In

2011, D company strengthened its independent innova-

tion and used international advanced diagnosis technol-

ogy to continue to strengthen new product development.

In this year, D company obtained 14 invention patents

from the National Patent Office and a software copyright.

Similar to D company, S company is also a

state-owned SME with many innovation achievements,

and is focused on explorative innovation. In 2004, the

state-owned assets administration wholly invested in

Group Company Ltd., which invested 32.61% to estab-

lish S company. From the composition of its board

members, only one member has a doctorate degree, and

three members served as president, chairman, and vice

chairman of the duties in relevant industry associations

of the national government, which has strong political

relations with industrial associatio ns.

From the viewpoint of controlling shareholders and

actual controllers, H company is a typical family enter-

prise formed by a father and a father-in-law. Nine people

are on the current board, with only two with Ph.D. de-

grees, and one member has an overseas education back-

ground. Considering that the relations between the cur-

rent chairman and former chairman are father and son,

we added the former chairman’s political relations to

measure the strength of political relations. One of the

board members once served as district and city deputy to

the National People’s Congress, which has strong politi-

cal relations, and two individuals have political associa-

tions with provincial and national industry associations.

Overall, H company’s political relations are relatively

weak. Therefore, innovative results from H company are

relatively less, with a lower total of number of patents. H

company remained in the stage of improving manage-

ment and innovation efficiency, which saves costs in

constructing a technical innovation department. Its R&D

Government R & D Subsidies, Political Relations and Technological SMEs Innovation Transformation

108

intensity only re mained at a relatively low level of 3% to

4%.

Through a comprehensive analysis of the above cases,

technological SMEs with strong er political relations tend

to do more explorative innovation with increased R&D

intensity, whereas technological SMEs with weaker po-

litical relations tend to do more exploitative innovation

with weak R&D intensity.

3.3. Government Support, Political Relations,

and Technological Innovation Performance

From the average amount of government subsidies in the

last five years, K company and D company respectively

obtained 19,525,020 Yuan and 17,065,490 Yuan, which

is roughly the same. However, their R&D investment,

R&D intensity, and technological innovation perform-

ance are very different.

K company was launched by Tang Weiguo, Xu

Xiande, and Sha Liwu, who were born in the 1940s.

These three actual controllers once served as director,

deputy director, and the backbone of scientific research

in the reagent institution of K company. K company is a

typical talent entrepreneurial enterprise. Currently, nine

people are on the board, w ith only on e having a do ctora te

degree, two once served as vice president and director of

national and municipal industry associations, and one

served as city deputy of th e Municipal People’s Congress.

We can see that K company has relative weak political

relations with industrial associations and deputies. Com-

paring the political relevance between two listing corpo-

rations, D company reflected political connections with

deputies, former government officials, and government

industry associations.

According to the data on the R&D input of K company,

we found that the average amount of self-R&D invest-

ment and government R&D subsidies of K company in

the most recent five years is roughly 20 million Yuan.

However, R&D intensity in the most recent five years is

only 3.876%, which is the same as fa mily enterp rises lik e

H company.

The number of patents is th e real objective measure of

technological innovation performance of a company.

Comparing patents obtained by K company with D com-

pany in nearly five years, we found that D company

greatly exceeded K company both in the number and

level of innovation. Based on a comparison of the above

cases, under the same amount of government R&D sub-

sidies, strong political relations can stimulate the po sitive

effect of government R&D subsidies on the technological

innovation performance of technological SMEs.

4. Conclusions and Limitations

Based on four case studies and analyses, we obtained

several findings as follows:

First, the amount of government subsidies affects the

choice of technological innovation path of SMEs: (1)

technological SMEs that obtained more government

R&D subsidies will change from exploitative innovation

to explorative innovation in a relatively short period of

time; (2) technological SMEs that received fewer gov-

ernment R&D subsidies will remain in exploitative in-

novation for a long ti me or will do less innovativ e activi-

ties.

Second, the intensity of political relations will affect

the technological innovation activities of SMEs: (1)

technological SMEs with stronger political relations will

increase R&D intensity and tend to do more explorative

innovation; (2 ) techno logical SMEs with weak er political

relations will decrease R&D intensity and tend to do

more exploitative innovation.

Finally, with access to the same government R&D

subsidies, technological SMEs with strong political rela-

tions will promote the positive effect of government

R&D subsidies on the technological innovation per-

formance of technological SMEs.

5. Acknowledgements

This paper is financed by Youth project of National So-

cial Science Fund in China, 12CGL010, 2012-2014;

Chinese Ministry of education of Humanities and social

sciences research Youth Fund Project, 12YJC630273,

2012-2014 and Central University Research Funds of

Hohai University, 2013B12114.

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