Firms receiving R&D subsidies are often assumed to be able to overcome market failure and have a socially desired level of R&D investment for technological innovation. However, we know relatively little about the impact of R&D subsidies on the way firms achieve innovation novelty. Drawing upon the knowledge recombinant view, this paper investigates how subsidized firms innovate with different dimensions of novelty by exploring their underlying knowledge recombination mechanisms. Using a unique dataset of 21,084 Chinese firms with 433,321 patents located in China’s equivalent of Silicon Valley, Zhongguancun, for the period 2009–2015, our empirical findings reveal that R&D subsidies foster firms to reuse existing combinations to innovate while discouraging the creation of new combinations beyond firms’ existing knowledge repertoires. These effects are further subject to industrial technological complexity in firms’ innovation environment which heightens subsidized firms’ innovation novelty based on recombinant reuse while damping recombinant creation. Theoretical and managerial implications are discussed.