Geographic proximity, information flows and corporate innovation: Evidence from the high-speed rail construction in China

Abstract

Using the construction of high-speed rail as a source of exogenous variation in proximity, this study investigates how geographic proximity affects corporate innovation. The construction of High-speed rail can improve geographical proximity by reducing the travel time and cost between areas. Using multi-period Difference-in-Differences model, we find that geographical proximity, which is increased after HSR construction, can stimulate corporate innovation in ways of inputs, outputs and efficiency. This association is robust after considering omitted variable concerns, adopting instrumental variable method and propensity score matching-DID to address possible endogeneity concerns. Further analysis shows that HSR can facilitate information flows and improve monitoring capabilities, which can spur corporate innovation by reducing financing constraints, strengthening talent flow and increasing institutional investors' site visits. In addition, the promotion effect is more prominent in private firms, small firms and those in areas with higher degree of property right protection. Our paper sheds new light on the effects of proximity on firms in the case of innovation.