Abstract:  Innovation activities funded by internal finance and external finance may create heterogeneous innovation quality. Based on the signal theory and mental accounting, this paper proposes that internal and external source of innovation funding tend to influence the quality of innovation results differently. Employing 2010~2017 panel data pertaining to China’s listed companies, a set of empirical results is obtained. The results show that both government subsidies and firms’ own R&D fees essentially promote substantial innovation, and also they both facilitate tactic innovation to some extent. Additionally, the interaction between two sources of funds significantly indicates that government subsidies stimulate firms’ own R&D fees. Moreover, compared with competitive industries, the interaction between government subsidies and firms’ own R&D fees in monopoly industries is stronger. These conclusions may have theoretical and practical contributions to innovation behavior and government subsidy distribution.

Key words:  innovation quality, government subsidy, innovation input, signal theory