State ownership, political connection, and innovation subsidies in China*

We examine how a firm's political connection measured by the membership of its CEO in the People's Congress (PC) or Chinese People's Political Consultative Conference (CPPCC) influences its likelihood of receiving the innovation subsidies given by the state. We find that politically connected firms are more likely to receive innovation subsidies. The political connection measured in this way is found much more important than state ownership in explaining the allocation of innovation subsidies. We also investigate if the firms that receive innovation subsidies are more innovative, productive, or profitable. Our results show that the firms that receive innovation subsidies file and receive more patents, but that their patents are not necessarily of high quality. They do not have higher productivity or profitability, either. The results collectively suggest politically induced inefficiency in the allocation of innovation subsidies in China.

Automated summary

This study examines the impact of political connections on the likelihood of Chinese firms receiving innovation subsidies. The findings suggest that politically connected firms are more likely to receive such subsidies, and that this connection is more important than state ownership. While firms receiving innovation subsidies file and receive more patents, these patents are not necessarily of high quality, and there is no increase in productivity or profitability. These results indicate politically induced inefficiency in the allocation of innovation subsidies in China.