Abstract
In this study, we examine how political connections increase firms’ innovation performance. By examining firm-level lobbying activities, we find that political connections lead to a greater number of medical breakthroughs among pharmaceutical firms in our sample. We then examine the underlying ways that political connections enhance innovation among medical firms. Using hand-collected data on government subsidies, we find that politically connected firms have a higher chance of receiving subsidies from federal, state, or local government agencies. These government subsidies enhance medical innovation by insulating managers from short-term threats and mitigate their career concerns by creating a “failure tolerant” environment. Overall, we show that connections between firms and politicians come with increased innovation outcomes.
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