In a turbulent global environment, small and medium-sized enterprises (SMEs) that drive technological change and contribute significantly to economies are facing mounting challenges. How to efficiently support SMEs has always been a focal point of attention for government and policymakers. Therefore, this paper investigates how SMEs' export strategies react to government support via the mediating role of innovation. Based on a novel and rich longitude dataset of Irish SMEs covering 2006-2018, we firstly examine how government subsidies impact SMEs' innovation performance, particularly investment in research and development (R&D). Secondly, using propensity score matching, we evaluate the indirect contribution of government subsidies to SMEs' export development. We do so by identifying the mediating role of policy-induced R&D in an SMEs' propensity to export, export product diversification, export market diversification, and export value. Empirical results indicate that government subsidies indeed incentivize SMEs to increase their R&D and initiate export activities and positively diversify their export portfolios. Our findings contribute to understanding how institutional factors affect firms' innovation activities and SMEs' export development process. They provide insights for policymakers on how government subsidies can best equip their home-grown businesses to succeed in international markets, especially those in small, open, and advanced economies. [ABSTRACT FROM AUTHOR]