Abstract: Factor market distortion weakens and even distorts the incentive effect of government subsidies on enterprise innovation. In order to more accurately reflect the degree and comprehensive effect of these two factors, this paper measures and verifies the impact of government subsidies and factor market distortion on enterprise innovation under the unified framework of two-tier stochastic frontier model by taking A-share listed companies in China′s manufacturing industry in 2009-2016 as research sample.The results show that, on average, the driving effect of government subsidies on enterprise innovation does not fully offset the restraining effect of market distortion on enterprise innovation, and the combined effect of the two results in that the actual innovation of enterprises is 7.91% lower than the effective innovation;through the study of property heterogeneity, regional differences and different life cycle perspectives, it is found that the comprehensive effects of government subsidies and factor market distortion make the actual innovation of enterprises lower than effective innovation, which has not improved significantly with the grouping of enterprise characteristics.Therefore, we should optimize the innovation ecosystem, establish a more perfect government subsidy mechanism, improve the factor market, and give full play to the driving effect of factor market on enterprise innovation.

Key words: government subsidies, factor market distortion, two-tier stochastic frontier model, enterprise innovation