Different consumer groups accept new energy vehicles sequentially from the perspective of innovation diffusion theory, and the early adopter group has recently been identified. By assuming that the density of early adopters is increasing at minimum acceptable quality thresholds, this paper proposes a vertical quality differentiation model of product R&D with product subsidies. The impact of product subsidies on the R&D investment of new energy vehicle firms is discussed. We show that the early adopters' characteristics may affect the stagnant marginal R&D investment of new energy vehicle firms by increasing sales, which determines the impact mechanism of product subsidies. For firms with decreasing marginal R&D investments, insufficient R&D investments result from financial constraints. If insufficient R&D resources deter firms from conducting R&D, substantial unit subsidies invariably incentivize firms to spend their entire R&D budget. Firms with increasing marginal R&D investments, insufficient R&D profits, or financial constraints are prevented from increasing R&D investment. Product subsidies generally have a crowding-in effect on firms not subject to financial constraints, and this effect increases with the unit subsidy. However, the existence of a crowding-in effect may require sufficiently large unit subsidies. In both situations, product subsidies cannot modulate financial constraints if the firm has spent its entire R&D budget. In the first situation, we also show that product subsidies should be replaced by a funding support policy. In contrast, the second situation shows that a funding support policy should be coordinated with product subsidies.

This paper evaluates the causal relationship between government subsidy and the innovation performance of new energy firms through count models using 2007–2021 data from China’s listed new energy companies. By looking at the subsidy for listed new energy firms and the number of granted patents, we find government subsidy policies significantly boost firms’ innovation performance. We estimate that a tenfold increase in government subsidy would lead to an increase of 7.11 in the total number of granted patents for new energy firms. Furthermore, a heterogeneity analysis shows such an effect varies depending on the nature of property rights, subsidy scale, and region for new energy firms. To be specific, state-owned firms are more dependent on government subsidy, the effect on innovation is generally higher in the high-subsidy group than in the low-subsidy group while being higher in the low-subsidy group when it comes to low-tech design patents, and firms in the eastern region are most sensitive to government subsidy. This paper also assesses the role of R&D investment in how government subsidy policies boost firms’ innovation performance; that is, by increasing their R&D funding investment rather than R&D manpower investment. These findings illustrate that in developing countries, government subsidy is effective in boosting new energy firms’ innovation performance.