How does the business cycle affect firm innovation? Evidence from China’s listed companies

Abstract

ABSTRACT This article investigates how the business cycle affects firm innovation performance by examining patent data for China’s listed companies from 2003 to 2017. The empirical results show that firms apply for more patents and receive more patent authorizations during economic recessions than during expansions. We uncover the mechanism underlying the countercyclical pattern of firm innovation performance by examining how the business cycle affects it through the moderating role of firm leverage while higher market concentration increases its sensitivity to the dynamics of the business cycle. We also find the more pronounced effect in state-owned firms and the positive effect of policy support on patent authorization performance, thus providing alternative explanations for the rise of firm innovation in China.