The effect of privatization on corporate innovation: New evidence from China’s ownership-transfer-privatization

Abstract

This paper investigates the effect of privatization on corporate innovation utilizing the SOEs’ ownership-transfer-privatization (OTP) in China. Adopting a multipleperiod difference-in-difference method, we find that privatization significantly reduces the quantity of privatized SOEs’ innovation while increases the quality of privatized SOEs’ innovation. Several robustness checks, which include alternative measures, parallel trends and placebo tests, and the dynamic effect of privatization, are performed to validate our findings. Moreover, we demonstrate that two mechanisms—outside government intervention and inside political connections—drive the identified effect of privatization. Our findings shed new light on the debate surrounding the effects of privatization on corporate innovation.