Innovation-driven policy and firm investment

Abstract

This study examines whether and how innovation-driven policy affects investment efficiency. Taking the approval of national innovation-driven pilot city as an exogenous shock, we conduct a staggered Difference-in-Difference (DID) approach to investigate the causal effects of the innovation-driven orientation on investment efficiency in the context of China. We find that the innovation-driven policy improves firms’ investment efficiency. Further, we distinguish under-investment and over-investment companies and find that after the approval of national innovation-driven pilot city, firms are more active in reducing redundant investments than their counterparts. The maintenance investment expenditure of firms is crowded out, while the investment in innovative R&D increases significantly. Heterogeneity analysis shows that the effect on investment efficiency is particularly pronounced in private firms and low financial constrained firms.