Political connections, financing constraints, and the optimization of innovation efficiency among China's private enterprises

Abstract

Abstract Innovation efficiency is an effective measure of an enterprise's innovation level. This study focuses on those factors that decide the innovation efficiency of Chinese private enterprises, and on the impacts that political relations and financing constraints have on enterprises' innovation efficiencies. By using dynamic panel data models, this study empirically examines 269 private listed companies between 2003 and 2008, and investigates the effects of political connections on financing constraints; furthermore, it discusses how financing constraints caused by political connections have differential effects on various enterprises' innovation efficiency. The results indicate that in an incomplete competition market environment, the “visible hand” and “invisible hand” dominate market resources simultaneously, and enterprises with political connections indeed face fewer financing restraints than those that do not. Nonetheless, this distribution mode of resources leads directly to a distortion in the distribution of all social resources. Based on this finding, to improve the innovation efficiency of Chinese private enterprises, the government should initiate long-term change and provide strong, short-term supervision. Enterprises themselves should strengthen internal management, use funds appropriately, optimize resource allocation, and actively carry out production and research and development activities—such as those involving innovation, which are beneficial to long-term development.