Abstract: As market failure exists, using public funding to support private R&D activities is a common practice in many countries. Many studies found out that public funding have a great influence on private R&D activities in terms of changing the private cost, expected return and risk of the R&D project. However, it is controversial to determine the direction of this influence—some studies suggest that public funding can stimulate private R&D, while others hold opposite opinions. The article emphasizes that the influence may vary by different firms. Based on the Private Enterprises data in China，the research uses Tobit model to analyzes the effect of public funding on private R&D. The results indicate that public subsidies can promote private enterprise’s R&D investment significantly. Meanwhile, this stimulating effect can also be affected by various firm characteristics such as entrepreneurship、firm size and institutional environment. Specifically, the stimulating effect is stronger in smaller firms, while the public funding has a negative effect on the R&D of firms whose owners have low education or more political connections. Furthermore, for the firms located in the regions with good institutional environment, mostly characterized by weak government intervention and strong legal quality，they would increase their total R&D expenditures after accepting the public R&D support. At the same time, the public funding may also cause crowdingout effect on firm’s R&D expenditures. Many subsidized firms may invest in other projects when their own R&D projects can be fully supported by the public funding, especially when they can hardly start new R&D project because of the restriction of resource like R&D personnel. Therefore，the paper gives some reasonable suggestions to use subsidy effectively. Firstly, the government needs to guarantee sufficient R&D subsidies continuously. Secondly, it is important to choose suitable firms, such as small firms and firms whose owners have high education, to ensure that the public funding can be used effectively. Finally, the government should also improve the institutional environment, like weakening government intervention and strengthening the protection of intellectual property rights.

Key words: R&D investment, stimulating effect, public subsidies