Agglomeration, absorptive capacity and knowledge governance: implications for public–private firm innovation in China

ABSTRACT

This paper considers the role of firm ownership structure, absorptive capacity and agglomeration on firm innovation in the Chinese context. A popular co-occurrence measure is used to measure local spillovers expected to take place between similar but different industries co-located together. Relying on a large panel of Chinese firms, this paper offers three main results: (1) privately owned enterprises (POEs) are more efficient innovators than their state-owned enterprise (SOE) counterparts; (2) local spillovers from related industries enhance firm innovation, especially for firms with higher pre-existing learning abilities; and (3) despite possessing relatively high levels of absorptive capacity, POEs maintain higher innovation performance compared with their SOE counterparts. These findings help confirm the absorptive capacity thesis, but also suggest that possessing relatively higher levels of absorptive capacity, in and of itself, is not always a sufficient precondition for firms to overcome all the cognitive and technological barriers to leveraging external sources of knowledge. In line with theories of knowledge governance, one explanation for this finding is that private (government) operators develop higher (lower) quality governance procedures that ultimately enhance (hamper) their ability to integrate successfully external sources of knowledge, even after developing a high level of absorptive capabilities.

KEYWORDS:

• innovation
• ownership structure
• spillovers
• absorptive capacity
• China

JEL:

• O31
• R11

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

Notes

1. The lower observed performance is due to several reasons, including inefficient structures of SOEs, lack of managerial knowledge, corruption and crony capitalism. See Megginson and Netter (2001) for a review.

2. Semi-POEs include the majority of SOEs that were restructured and transformed into minority SOEs or hybrid firms mostly in the mid- and late 1990s.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant number 71603009].