Abstract: Based on the sample data spanning from 2008 to 2013 of private small and medium-sized listed firms, this paper examines the impact of government subsidies on the firms’ R&D investment from a new perspective of political connection. The empirical results show that private firms with political connection do get more government subsidies, and moreover, the poorer the institutional environments are, the more meaningful for private firms to establish political connection. For private firms with political connection, government subsidies exert “stimulation effect” on R&D investment, which means that establishing political connection is an efficiency-promoting behavior for private firms. The results still exist when endogenous problems are controlled. From the view of the government, political connection has become a supervision mechanism by restricting the managers’ abuse of funds to increase operating efficiency of private firms and achieve the goal of policies so as to promote the development of national economy.