Subsidy Phase-Out, Innovation, and Policy Design: Evidence from China’s Photovoltaic Industry

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Abstract
This study examines the impact of subsidy phase-out policies on firm-level research and development (R&D) investment in the new energy sector. A sequential game-theoretic model is developed to analyze strategic interactions between government and firms, and its implications are empirically tested using a propensity score matching difference-in-differences approach based on Chinese listed manufacturing firms from 2016 to 2021. The results show that subsidy phase-out policies significantly reduce firms’ R&D investment. This negative effect operates primarily by deteriorating firms’ operating performance. The impact is more pronounced for non–state-owned firms, high-growth firms, and firms located in central regions. The theoretical analysis further reveals that subsidy efficiency, market expansion effects, and firms’ subsidy capture rates exhibit diminishing marginal returns. Excessive subsidies also redirect fiscal resources toward consumers with weaker low-carbon preferences. Based on these findings, this study proposes an integrated subsidy phase-out mechanism incorporating the phase-out rate, critical trigger thresholds, and the phase-out period. The mechanism is designed to prevent market contraction, ensure that policy exit is synchronized with the growth of endogenous market forces, and ultimately facilitate the transition of the new energy industry from policy-driven to market-driven development.

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