Abstract: Using 30,0000 industrial enterprises' panel data from 2005 to 2007 in China, the descriptive statistics brought the following conclusions. Firstly, individual firm's internal self-raised fund gradually becomes the main source of R&D expenditure with decreasing fiscal subsidies. Secondly, the distribution of fiscal subsidies and enterprises' R&D investment vary from industries. Thirdly, State-owned enterprises account for the largest proportion of R&D expenditure and benefit most from fiscal subsidies. Though fiscal subsidies can stimulate the firms' R&D, estimation of threshold panel data model shows that the relationship between fiscal subsidies and firm R&D is non-linear. The optional ration of fiscal subsidies to firm R&D investment ranges from 13.45% to 27.75% for SOEs in manufacturing industries. Fiscal subsidies have a crowding-in effect on firm R&D investment in that interval, but exhibit a crowding-out effect when that ration exceeds 27.75%. There is only crowding-in but no crowding-out effect for privately-owned firms, especially high-tech privately firms. The threshold value to trigger crowing-out effect is larger in manufacturing industries than high-tech industries. Therefore, the key to promote the efficiency of fiscal subsidies and stimulate firm R&D investment is to properly price the compensation rate of R&D investment, and strength the support to privately-owned firms, especially firms in high-tech industries.

Key words: fiscal subsidies, R&D investment, distribution features, threshold effects