Does flattening the government hierarchy improve corporate innovation? Evidence from China

Abstract

ABSTRACT We examine the impact of flattening the government hierarchy on corporate innovation. Leveraging the change from province–city–county to province–managing–county (PMC) administrative structures in China, we use a different-in-differences research design to show that the PMC reform enhances corporate innovation. The results are robust to a battery of checks. We report that political connection, state-ownership of firms and improved government services mediate the effects of the PMC reform on corporate innovation. Moreover, in the cross-sectional analysis, we find that the impact of the PMC reform is more salient for non-state-owned firms or when a province has new leadership.