Effect of renewable energy subsidy policy on firms’ total factor productivity: The threshold effect

Studies examining the influence of government subsidies on total factor productivity have yielded inconsistent conclusions. Utilizing data from 114 renewable energy companies in China from 2011 to 2022, this study empirically investigated the threshold effects of government subsidies on the total factor productivity of these firms. The research findings indicate: (1) Government subsidies reduce Chinese renewable energy firms' total factor productivity, with a more significant negative impact on firms with lower total factor productivity. (2) These subsidies negatively influence total factor productivity by reducing firms’ capacity utilization and increasing rent-seeking costs. (3) The influence of government subsidies on total factor productivity shows a single-threshold effect related to technological innovation. When technological innovation surpasses a certain threshold, the adverse impact of these subsidies is weakened. Therefore, it is recommended that the government limit excessive subsidies and simultaneously encourage renewable energy firms to enhance their technological innovation. •Government subsidies (GS) reduce the TFP of renewable energy firms.•The negative impact of GS on TFP is more significant for firms with lower TFP.•GS decreases capacity utilization and increases rent-seeking costs.•Technological innovation can mitigate the adverse effects of GS on TFP.•The government should avoid excessive GS and encourage technological innovation.