Political turnover and corporate research and development: evidence from China

ABSTRACT

This paper documents cycles in corporate research and development corresponding with the timing of political turnover. Utilising the data on local government officials and research and development activities at the firm level in China, firms’ intensity of research and development input is found to be negatively associated with a turnover in local political leaders. We investigate several potential explanations and find evidence supporting that political turnover reduces the incentives of firms to invest in research and development until the uncertainty is resolved.

KEYWORDS:

• Political turnover
• research and development
• local government
• China

JEL:

• O32
• O38

Acknowledgments

We would like to thank the anonymous referee and the editor for helpful comments and suggestions. This research was supported by the Center for China Fiscal Development, Central University of Finance and Economics.

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ China’s annual growth rate has slowed to below 8% since 2012 according to the National Bureau of Statistics.

² This paper also obtains essentially identical results if the authors used the ratio of research and development expenses to net profit as an alternative measure of research and development intensity.

The related research and development expenses and sales data for Chinese firms are taken from the CSMAR database.

³ Data on the change in mayor and municipal party secretary are also obtained from the CSMAR database, covering 236 cities. We define the turnover in year 1 if it happens in the first half of year 1, whilst the turnover in year 2 if it occurs in the second half of year 1.

For robustness, we also examine the investment effect of political turnover happened in mayor and party secretary separately.

⁴ Data on firm-level basic information are also extracted from the CSMAR database.

⁵ Data on those city-level control variables are taken from the China City Statistical Yearbook.

⁶ A positive and significant $\beta$ suggests that political turnover exerts a positive effect on research and development investment, whilst a negative and significant $\beta$ implies that the turnover pushes the intensity of research and development lower.