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.
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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