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Government subsidies and total factor productivity: The conflict between economic and social objectives

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  • Li, Quan
  • Li, Wei
  • Liu, Junfeng

Abstract

This study investigates the critical role of government subsidy policy objectives in influencing firms’ total factor productivity (TFP) through the lens of conflicting policy goals between equity and efficiency. Utilizing panel data from Chinese manufacturing listed companies spanning 2010–2022, the research employs heterogeneous policy analysis to demonstrate that employment subsidies (targeting social equity) and R&D subsidies (focusing on economic efficiency) both achieve their intended objectives — expanding labor employment for the former and stimulating R&D investment for the latter — yet exhibit divergent effects on TFP. Specifically, employment subsidies create labor redundancy systematically depressing TFP growth. In contrast, R&D subsidies significantly boost TFP. The findings reveal an inherent trade-off in government subsidy design: employment-oriented policies may undermine productivity, whereas innovation-driven initiatives struggle to address employment absorption. This research provides theoretical and practical guidance for optimizing government subsidy policies, emphasizing the diversity and complexity of policy goals, and revealing the challenges in achieving both fairness and efficiency.

Suggested Citation

  • Li, Quan & Li, Wei & Liu, Junfeng, 2025. "Government subsidies and total factor productivity: The conflict between economic and social objectives," Finance Research Letters, Elsevier, vol. 85(PD).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pd:s1544612325012826
    DOI: 10.1016/j.frl.2025.108024
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