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Financial slack and firm performance of SMMEs in China: Moderating effects of government subsidies and market-supporting institutions

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  • Guo, Feng
  • Zou, Bo
  • Zhang, Xiaofei
  • Bo, Qingwen
  • Li, Kai

Abstract

How does financial slack affect the firm performance of small and medium-sized manufacturing enterprises (SMMEs)? By integrating the literature on financial slack and the institutional perspective, we predict the following: financial slack positively affects the firm performance of SMMEs; research and development (R&D) investment mediates the effect of financial slack on firm performance; and government subsidies and market-supporting institutions positively moderate this mediating effect. Using 543 firms’ 4489 firm-year observations of Chinese SMMEs, the empirical results indicate that financial slack promotes firm performance. In addition, R&D investment partially mediates the relationship between financial slack and firm performance. Moreover, the relationship between financial slack and R&D investment is weakened in high levels of government subsidies, and the relationship between R&D investment and firm performance is strengthened in high levels of government subsidies and market-supporting institutions. Theoretical contributions, practical implications, limitations, and future research avenues are discussed.

Suggested Citation

  • Guo, Feng & Zou, Bo & Zhang, Xiaofei & Bo, Qingwen & Li, Kai, 2020. "Financial slack and firm performance of SMMEs in China: Moderating effects of government subsidies and market-supporting institutions," International Journal of Production Economics, Elsevier, vol. 223(C).
    • Handle: RePEc:eee:proeco:v:223:y:2020:i:c:s0925527319303573
    DOI: 10.1016/j.ijpe.2019.107530
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