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The purpose of this paper is to investigate the effects of Chinese government financial incentives on firms� innovation performance during the nation's initial economic transition period in the mid-1990s. Through a large-scale empirical survey of more than 1000 Chinese manufacturing firms, the empirical evidences show that whereas the major government financial incentives such as Special Loans and Tax Credits were positively influential to innovative economic performance of firms, Direct Earmarks not only failed to enhance innovative economic performance, it sometimes negatively affected it. Surprisingly, the findings show that all financial incentives of governments were unrelated to the patents of either high-tech or general firms and Direct Earmarks affected the patents of these firms negatively, although not to a significant degree. This indicates that the centrally planned funding system of the 1990s was ineffective for enhancing technological progress for Chinese manufacturing firms. The study results imply that the Chinese government should further increase the role of market force in its reforms. A more market-driven model by developing more S&T initiatives to match the strategic directions of different enterprises, particularly SOEs, is recommended.
