Do government subsidies promote financial performance? Fresh evidence from China's new energy vehicle industry

Government subsidies have always been regarded as an essential policy tool to promote the development of new energy vehicle (NEV) industry. The NEV industry refers to the companies engaged in the production and application of NEVs, mainly including suppliers of raw materials, suppliers of core components, vehicle manufacturers and retailers. However, the effect of subsidies on NEV enterprises is controversial. In this regard, understanding the impact of subsidies on different firms operating at various levels across the NEV industrial chain is crucial to harness the benefits of subsidies effectively. Therefore, we use empirical data from China's 153 NEV listed firms between 2009 to 2018 operating at downstream, midstream, and upstream levels of the industrial chain to assess the impact of subsidies on firm financial performance. Our overall results indicate that subsidies have a significant negative effect on firms’ financial performance by employing the fixed-effect model. Moreover, we observe the heterogeneous impact of subsidies on companies’ financial performance when NEV enterprises are further divided into different groups based on their business characteristics, geographical location, and ownership structure. The findings suggest that the impact of subsidies on upstream firms’ financial performance is greater in comparison to the firms operating at midstream and downstream levels. Furthermore, the negative effect of subsidy on the firms located in the mid-western region and non-state-owned enterprises is stronger compared with the firms in the eastern region and state-owned enterprises. Our findings are robust with replacing the dependent variable, investigating the moderating of rent-seeking, and using the instrumental variable method.