Supply network and firm innovation: Evidence from China

Successful innovations not only hinge on the firm's internal characteristics, but also closely relate to its involvement in supply networks. Unlike most previous studies that focus on the ego network surrounding a focal firm, our study expands the view to the entire nationwide supply network and investigates how a firm's network centrality facilitates its innovations. Leveraging a novel dataset on inter-firm relationships, we trace the evolution of the supply network among Chinese firms from 2007 to 2021. Our analysis demonstrates that firms with higher network centrality tend to devote more efforts to innovation and acquire more innovation outputs. Centrally positioned firms enjoy enhanced access to external financing and valuable information sharing. These advantages have contributed to the recent increase in internal innovation efforts by Chinese firms to mitigate the impact of U.S. economic sanctions.