Centralized procurement authority and corporate innovation

Leveraging the establishment of the National Healthcare Security Administration (NHSA) in China as an external policy change, we demonstrate that the government's centralized control over drug procurement platform and insurance coverage catalog significantly enhances the innovation activities of pharmaceutical companies. By manually adjusting for expenditures of passing consistency evaluation, we accurately measure effective research and development inputs. Further tests reveal two key mechanisms driving our result: first, NHSA policies negatively impact firms' financial performance and stock returns, leading affected firms to invest more in innovation; second, increased competition further incentivizes innovation, especially among firms that lose more market shares. Importantly, companies with stronger internal resources are more successful in translating these pressures into effective innovation. Our results show that the NHSA not only redefines competitive dynamics but also acts as a powerful catalyst for pharmaceutical innovation, contributing to the understanding of the policy implications of centralized public procurement.