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Political Uncertainty and Innovation in China

Author

Listed:
  • Feng, Xunan

    (Southwestern University of Finance and Economics)

  • Johansson, Anders C.

    () (Stockholm China Economic Research Institute)

Abstract

We hypothesize that political uncertainty has an adverse effect on investments in activities related to innovation. Combining two hand-collected data sets on changes in local government officials and research and development (R&D) activity at the firm level in China, we examine how political turnover influences investments in R&D. We find that a change in local political leaders is associated with a significant decrease in R&D activity. This result is robust to various robustness tests. The decrease is larger when the new political leader is promoted from outside the city in question. Moreover, the decrease is significantly larger for privately controlled firms, firms operating in regions characterized by weak economic institutions, and firms within R&D-intensive industries. Our findings suggest that political uncertainty constitutes an important channel through which the local political process influences activities related to innovation.

Suggested Citation

  • Feng, Xunan & Johansson, Anders C., 2017. "Political Uncertainty and Innovation in China," Stockholm School of Economics Asia Working Paper Series 2017-44, Stockholm School of Economics, Stockholm China Economic Research Institute.
  • Handle: RePEc:hhs:hascer:2017-044
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    File URL: http://swopec.hhs.se/hascer/papers/hascer2017-044.pdf
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    Cited by:

    1. Wei-Fong Pan, 2019. "Geopolitical Risk and R&D investment," Economics & Management Discussion Papers em-dp2019-11, Henley Business School, Reading University.
    2. Sophia Chen & Lev Ratnovski & Pi-Han Tsai, 2017. "Credit and Fiscal Multipliers in China," IMF Working Papers 17/273, International Monetary Fund.

    More about this item

    Keywords

    Innovation; R&D expenditures; Political turnover; Political uncertainty; Local officials; China;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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