Abstract: This paper empirically demonstrates how the effect of government R&D subsidies’ on private R&D investment based on the panel data collected from 112 SMEs in China over the period from 2009 to 2013. We find that government R&D subsidies significantly has incentive effect on private R&D spending of SMEs. And also, we find that political connections don’t significantly moderate the above relations. Further, we explore the nonlinear relations between government R&D subsidies and SMEs R&D spending through building a threshold regression model, and find that differential effect of government R&D subsidies on SMEs’ R&D investment under different intensities of R&D subsidies.

Key words: technological SMEs, political connections, government R&D subsidies, private R&D investment, threshold effect