Anti-corruption, marketisation and firm behaviours: evidence from firm innovation in China

Abstract

China has launched an anti-corruption campaign since the Eighteenth CPC National Congress, which has exerted widespread influences on Chinese politics and economy. This paper examines the effect of the anti-corruption initiative on firm behaviours from the perspective of research and development (R&D) investments. It shows that pursuing political connections and improving innovation are two mutually exclusive alternatives for firm growth in China. The anti-corruption campaign raises the cost of seeking for political bond and strengthens the incentive for firm innovation. After anti-corruption policies and regulations were issued, R&D expenditure in politically connected firms increases significantly; the anti-corruption initiative has positive effects on firm innovation. Further research shows that the effects vary with different types of firms. For state-owned enterprises (SOEs), the anti-corruption initiative only increases the R&D investments of firms with senior executives who used to serve in the government; while for non-state-owned enterprises (non-SOEs), this campaign has all-around positive effects on their R&D investments. In the meantime, a heterogeneity at the provincial level is observed: R&D investments of firms with political connections increase more significantly in provinces with more intense anti-corruption efforts. Finally, marketisation also has a role to play. For regions with a more developed market economy, anti-corruption increases the innovation of firms with political connections; whereas in regions with a less developed market economy, this effect is insignificant. This paper provides evidence for the opinion that anti-corruption is favourable to economic growth in China. To solve the endogeneity problem, it uses data obtained from the anti-corruption policy experiment since the Eighteenth CPC National Congress and the difference-in-differences (DID) method to further test the hypotheses.