Can a Fast-Expanding Market Sustain with Supply-Side Government Aid? An Investigation into the Chinese Solar Photovoltaics Industry

The solar photovoltaics (PV) industry is a policy-driven business, in that political decisions considerably influence potential market takeoff or decline. This is particularly true for China. Between 2006 and 2010, the annual growth rate of solar panel output approached or exceeded 100%, with suppliers receiving financial aid from the government. Despite the prevalence of supply-side aid, its actual impact on the development of this fast-expanding market is debatable. We focus on 249 observations of 75 solar PV companies from 2005 to 2012, and investigate how government aid received in the form of bank loans and direct subsidies by these companies influenced their performance. Our empirical results show that supply-side government aid in China helps improve scale efficiency to a certain extent, but has a limited impact on technology efficiency. We find that supply-side aid leads to diseconomies of scale in the long run and, thus, to low efficiency and profitability. © 2015 Wiley Periodicals, Inc.