Policy uncertainty and corporate innovation in a transitional economy: evidence from China

ABSTRACT

This paper systematically studies whether external shocks of mayor turnover in prefecture level cities in China, proxied for policy uncertainty, result in a reduction of firms’ R&D spending. We find that policy uncertainty is negatively correlated with firms’ R&D spending under mayor turnover. This finding only exists in state-owned enterprises (SOEs) that are inherently and closely connected with regional governments. The negative effect between R&D spending and policy uncertainty is more profound for SOEs operating in an uncertain macroeconomic environment, facing high risk and having financial constraints.

KEYWORDS:

• Policy uncertainty
• mayor turnover
• r&d spending
• china

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Report delivered by President Hu at the 18th National Congress of the CPC held in 2012 indicated that the country will undertake and implement the strategy of innovation-driven development. See this website for more details: http://www.china.org.cn/china/18th_cpc_congress/2012-11/16/content_27137540.htm

2. See ‘2017 statistical bulletin of the national scientific research funds’ jointly released by National Bureau of Statistic, Ministry of Science and Technology, and Ministry of Finance.(http://www.stats.gov.cn/tjsj/tjgb/rdpcgb/qgkjjftrtjgb/201810/t20181012_1627451.html)

3. Sample selection period is due to the availability of firms’ R&D spending data provided in the CSMAR Database beginning from 2007.

4. We also conduct additional tests to examine whether firms reallocate their resources to other projects that may cater to the new mayor’s short-term interests. However, results do not support this argument. Due to the limited space, we do not report these results but can be provided upon request.

5. Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Hirschman (1964) provides explanation for the original index construction.

6. We are very thankful to the anonymous referee for suggesting to control the regional fixed effects.

7. In order to examine whether firms have intention to reallocate resources for the purpose of cultivating a new political connection when a new mayor takes the office, we conduct empirical tests to exclude the possible interference of political connection on firms’ R&D decisions. Due to the limited space, results are not provided in the study but available upon request.

8. We first come up with the unadjusted environmental uncertainty using standard deviation of abnormal sales revenue in the past 5 years divided by the mean of sales revenue in the last 5 years. The median of the unadjusted environmental uncertainty for all companies in the same industry in the same year represents industrial environmental uncertainty. Using the unadjusted environmental uncertainty divided by industrial environmental uncertainty, the adjusted environmental uncertainty, the EU index, is then constructed.

9. Due to the limited length required, results are not reported but will be provided upon request.

10. Results can be provided upon request.

11. Results will be provided upon request.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71772078, 72072190, 72102078].