The impact of economic policy uncertainty on corporate innovation in China: the role of family ownership and political connections

ABSTRACT

Economic policy uncertainty (EPU) may pose a risk or provide an opportunity for corporations. This study empirically investigates the impact of EPU on the corporate innovation of Chinese firms using patent information as a proxy for corporate innovation. The study then examines whether family ownership and political connections impede/boost corporate innovation. Using a longitudinal panel dataset of 3,085 Chinese firms listed during the period from 2009 to 2020, the study observes that EPU enhances corporate innovation in China. The study also finds that family firms negatively impact innovative projects during EPU. The study then shows that political connections positively moderate the effects of EPU on corporate innovation. The results of the study are robust to time and industry fixed effects, endogeneity issues, and firm-level time-varying factors.

KEYWORDS:

• Corporate innovation
• family ownership
• political connections
• policy uncertainty
• China

JEL CLASSIFICATION:

• C23
• G11
• G30
• G38

Disclosure statement

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

Notes

¹ A firm is considered a family firm if 1) a family member is the largest shareholder with more than 20% ownership and also the controller and 2) a family collectively owns more than 20% of the ownership and controls the firm.

² We did not include these variables in our baseline regression analysis due to missing values. Including these variables in our regression models reduces the number of observations from 28,046 to 21,073.