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Innovation-driven policy and firm investment

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  • Hou, Guangwen
  • Feng, Chenyang

Abstract

This study examines whether and how innovation-driven policy affects investment efficiency. Taking the approval of national innovation-driven pilot city as an exogenous shock, we conduct a staggered Difference-in-Difference (DID) approach to investigate the causal effects of the innovation-driven orientation on investment efficiency in the context of China. We find that the innovation-driven policy improves firms’ investment efficiency. Further, we distinguish under-investment and over-investment companies and find that after the approval of national innovation-driven pilot city, firms are more active in reducing redundant investments than their counterparts. The maintenance investment expenditure of firms is crowded out, while the investment in innovative R&D increases significantly. Heterogeneity analysis shows that the effect on investment efficiency is particularly pronounced in private firms and low financial constrained firms.

Suggested Citation

  • Hou, Guangwen & Feng, Chenyang, 2024. "Innovation-driven policy and firm investment," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s154461232400031x
    DOI: 10.1016/j.frl.2024.105001
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