Population agglomeration and the effectiveness of enterprise subsidies: a Chinese analysis

This paper investigates the impact of population agglomeration on the relation between government subsidies and firm innovation. It constructs a parsimonious model to show that the positive effect of government subsidies on innovation by small-cap enterprises should be pronounced only in regions with higher population densities. Moreover, using the ‘mass entrepreneurship and innovation’ policy implemented by the Chinese government in 2015, and the resulting boost in government subsidies to small-cap enterprises as a natural experiment, the paper confirms the theoretical prediction and demonstrates that population density strengthens the positive relationship between government subsidies and firm innovation in small-cap enterprises. When the population density of a region is below a certain threshold (1100 people/km²), the positive connection between government subsidies and technological innovation disappears.