Short-term success and long-term failure? The case of GDP growth targets and corporate innovation

Abstract

Excessive focus on achieving short-term economic success in China may risk its long-term prosperity. Using a large sample of Chinese listed firms, we find that a higher GDP growth target suppresses corporate innovation, and the relationship is more pronounced in less developed areas. We also find that local governments affect corporate innovation through both direct and indirect mechanisms. The direct mechanism shows that firms that are more subject to government intervention (e.g., large firms, SOEs, and grantees of government subsidies) exhibit a more negative relation between GDP growth targets and corporate innovation. The local government also strategically changes its fiscal spending, creating an environment that indirectly affects corporate innovation. Our results are robust to various robustness checks. Further analysis reveals that the negative effect of GDP growth targets on corporate innovation is exacerbated in less developed areas and that a reduction in R&D does not lead to less purchase from suppliers or less employee compensation. This study sheds light on a real effect of regional GDP growth targets based on the unique Chinese political-economic setting.