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Host country policies shape the incentives and opportunities of MNC subsidiaries to innovate. While strategy and international business literature has broadly acknowledged government action as an important factor for knowledge creation in MNC subsidiaries, we have scant evidence for the precise link between technology policy and MNC subsidiary innovation investment decisions and their outcomes. In this study, we investigate whether domestic firms and MNC subsidiaries respond differently to R&D subsidies, an important dimension of technology policy, by integrating theory from subsidy additionality literature into models of MNC subsidiary innovation. Based on longitudinal data from Germany, we find that foreign MNC subsidiaries increase their R&D investments more than comparable domestic firms in response to an R&D subsidy. Moreover, MNC subsidiaries experience comparatively stronger effects in innovation performance from subsidy-induced R&D since they have more opportunities to recombine knowledge within the MNC. However, subsidies also shift away the attention from the subsidiaries' original R&D activities. Our findings have implications for both MNC subsidiaries and policy makers who seek to attract foreign R&D investment in a host country. [ABSTRACT FROM AUTHOR]