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This paper investigates the effects two government funding structures (cost sharing v.s. performance reward) on private R&D and firm growth in China. The results show that central government tends to subsidy firms' R&D using a performance reward structure, which may reduce the return of private R&D. However, the local government tends to adopt the cost sharing structure, which can increase the return of private R&D.

By building the dynamic four-game model whose main bodies include science & technology SME borrowers, banks, government and security agencies, this article analysis the main bodies' optimal behavior under the sub-game perfect equilibrium in the credit market, and discuss the conditions which need to be reached to achieve this equilibrium. It is shown that the Government's science and technology investment play a crucial role in the micro-financing mechanisms for small and medium enterprises.