How does the business cycle affect firm innovation? Evidence from China’s listed companies

ABSTRACT

This article investigates how the business cycle affects firm innovation performance by examining patent data for China’s listed companies from 2003 to 2017. The empirical results show that firms apply for more patents and receive more patent authorizations during economic recessions than during expansions. We uncover the mechanism underlying the countercyclical pattern of firm innovation performance by examining how the business cycle affects it through the moderating role of firm leverage while higher market concentration increases its sensitivity to the dynamics of the business cycle. We also find the more pronounced effect in state-owned firms and the positive effect of policy support on patent authorization performance, thus providing alternative explanations for the rise of firm innovation in China.

KEYWORDS:

• Business cycle
• firm innovation
• patent authorization
• patent application

Notes

1. Data from the National Bureau of Statistics of China show that R&D spending increased from 0.52% in 2006 to 2.18% in 2018, while the number of patent authorizations increased rapidly from 470,000 to 3.99 million over the same period.

2. China’s GDP growth rate rose from 9.1% in 2002 to 14.2% in 2007.

3. China’s GDP growth rate was only 9.7% in 2008 and 9.4% in 2009.

4. From 2012 to 2016, China’s GDP growth rate was 7.9%, 7.8%, 7.3%, 6.9%, and 6.7%, respectively.

5. More emphasis can be placed on the rarer observations by taking the natural logarithms of the numbers. To avoid the possibility of taking the logarithm of zero in cases in which some companies had “zero” patent licenses in some years, one is added to the number of observations.

6. For example, the outbreak of the global financial crisis in 2008 can be traced back to the expansion of the US subprime mortgage crisis.

7. Note that even with the outbreak of the Sino-US trade war in 2018, the import and export volume of Sino-US bilateral trade reached $633.52 billion.

8. According to a report by the China National Bureau of Statistics, the total value of bilateral imports and exports between the United States and China jumped from $126.33 billion to $635.97 billion from 2003 to 2017.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [numbers 71801057, 11701106]; the Natural Science Foundation of Guangdong Province [numbers 2018A030313968, 2019A1515011649]; the Characteristic Innovation Projects of Colleges and Universities in Guangdong Province [number 2019KTSCX036]; the Postgraduate Innovation Projects of Guangdong University of Foreign Studies [number 19GWCXXM-40]. Any errors or omissions are solely the responsibility of the authors.