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Stockholm China Economic Research Institute, Stockholm School of Economics Stockholm School of Economics Asia Working Paper Series

No 2017-44:
Political Uncertainty and Innovation in China

Xunan Feng and Anders C. Johansson ()

Abstract: We hypothesize that political uncertainty has an adverse effect on investments in activities related to innovation. Combining two hand-collected data sets on changes in local government officials and research and development (R&D) activity at the firm level in China, we examine how political turnover influences investments in R&D. We find that a change in local political leaders is associated with a significant decrease in R&D activity. This result is robust to various robustness tests. The decrease is larger when the new political leader is promoted from outside the city in question. Moreover, the decrease is significantly larger for privately controlled firms, firms operating in regions characterized by weak economic institutions, and firms within R&D-intensive industries. Our findings suggest that political uncertainty constitutes an important channel through which the local political process influences activities related to innovation.

Keywords: Innovation; R&D expenditures; Political turnover; Political uncertainty; Local officials; China; (follow links to similar papers)

JEL-Codes: G18; G32; G38; O30; O31; O32; (follow links to similar papers)

55 pages, November 15, 2017

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