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Corporate innovation and political connections in Chinese listed firms

Author

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  • Hou, Qingsong
  • Hu, May
  • Yuan, Yuan

Abstract

This paper examines the relationship between political connections and corporate innovation in China. We find that political connections hinder corporate innovation activities and reduce innovation efficiency, suggesting the existence of political resource curse effect on corporate innovation in Chinese firms. In addition, we find that political connections reduce market competition and increase firms' overinvestments, leading to the crowding out effect with the limited resources insufficiently and inefficiently allocated to corporate innovation in firms. We also find that political connections weaken the impact of corporate innovation on firm future performance. Nonpolitically connected firms with patent applications have better and more effective future business performance than politically connected firms. This study provides policy implications for policy makers to reduce government-led resource allocation, improve market-oriented innovation mechanism, and standardize government subsidies to make the allocation process more transparent, so that corporate technological innovation can lead to the regional and national economic growth.

Suggested Citation

  • Hou, Qingsong & Hu, May & Yuan, Yuan, 2017. "Corporate innovation and political connections in Chinese listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 158-176.
    • Handle: RePEc:eee:pacfin:v:46:y:2017:i:pa:p:158-176
    DOI: 10.1016/j.pacfin.2017.09.004
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    More about this item

    Keywords

    Corporate innovation; Political connections; China;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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