The power of title: Unintended consequences of a place-based innovation policy in China

This paper examines the unintended consequences of China's National Intellectual Property Model City program, a prominent place-based innovation policy. Using a staggered difference-in-differences design on firm-level data from 2008 to 2022, we find that the designation paradoxically leads to a significant decline in corporate patenting. We argue this stems from a shift in local government incentives. To retain the prestigious title, officials prioritize easily manipulated administrative metrics, such as compliance and public campaigns, over fostering substantive innovation. This leads to excessive administrative burdens and the misallocation of financial resources (subsidies and bank loans) toward politically-connected state-owned enterprises (SOEs), crowding out more innovative non-SOEs. Consequently, the negative innovation effect is concentrated among these non-SOEs. The distortion is amplified when local officials face promotion evaluations. Our findings reveal how political incentives in place-based policies can inadvertently stifle genuine corporate innovation.