Scandinavian Working Papers in Economics

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

No 2017-44: Political Uncertainty and Innovation in China

Xunan Feng and Anders C. Johansson ()
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Xunan Feng: Southwestern University of Finance and Economics
Anders C. Johansson: Stockholm China Economic Research Institute, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

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

JEL-codes: G18; G32; G38; O30; O31; O32

55 pages, November 15, 2017

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