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Power of competition: Unraveling the impact of China's fair competition review system implementation on firm innovation

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  • Xiao, Zumian
  • Wang, Shuhan
  • Zhang, Yepeng
  • Si, Deng-Kui

Abstract

This paper exploits the introduction of China's Fair Competition Review System in 2016 as a quasi-natural experiment to analyze the impact of changes in market competition on firm innovation. Our findings illustrate that heightened competition fosters innovation at the firm level. After the implementation of the Fair Competition Review System, monopolistic firms face enhanced financing constraints and reduced free cash flows, while their degree of financialization is also curbed. Furthermore, the management's emphasis on innovation strengthens the motivational effect of competition on innovation. The results from heterogeneity analysis suggest that the Fair Competition Review System's stimulating effect on innovation is especially salient for state-owned enterprise, non-high-tech enterprises, large firms, and those located in regions with lower levels of marketization.

Suggested Citation

  • Xiao, Zumian & Wang, Shuhan & Zhang, Yepeng & Si, Deng-Kui, 2023. "Power of competition: Unraveling the impact of China's fair competition review system implementation on firm innovation," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1561-1581.
    • Handle: RePEc:eee:ecanpo:v:80:y:2023:i:c:p:1561-1581
    DOI: 10.1016/j.eap.2023.11.005
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    More about this item

    Keywords

    Firm innovation; Fair competition review system; Quasi-natural experiment; Difference-in-difference estimation;
    All these keywords.

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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