Pushing boundaries or overstepping? Exploring the paradoxical impact of radical innovation on government subsidies in Chinese SMEs

Abstract

Does radical innovation always benefit small and medium-sized enterprises (SMEs)? This paper explores the potential drawbacks of radical innovation by examining the complex relationship between the degree of innovation radicalness and government subsidies, within the framework of dual-process signalling theory. The study highlights the importance of both signal observability and the costs of signal interpretation in the context of obtaining government subsidies. Although an increase in innovation radicalness may enhance a firm's visibility to governments, it also significantly raises the costs associated with interpreting signals. As a result, there is an inverted U-shaped relationship between innovation radicalness and government subsidies. Furthermore, we found a positive moderating effect of political connections, suggesting that signal observability increases with stronger political ties. We tested our hypotheses using data from listed SMEs in China between 2004 and 2019. Our findings contribute to the literature on innovation and SMEs by indicating that the effects of radicalness may represent a case of ‘too much of a good thing’ for firms.