With trust we innovate: Evidence from corporate R&D expenditure

Abstract

We examine the impact of social trust on corporate R&D expenditure. Using a large sample of 1811 Chinese firms during 2007–2018, we show that social trust significantly promotes corporate R&D expenditure. Firms located in higher social trust regions invest 6.16 % (4.17 %) more in R&D1 (R&D2) than those located in lower social trust regions. This result is robust to a battery of robustness checks and endogeneity corrections using the instrumental variable approach, and is more pronounced for non-state owned enterprises (non-SOEs), small firms, firms with low cash flow, firms with weak corporate governance, and firms located in regions with lower marketization index. We further find that, social trust is positively associated with higher innovation output as measured by patents. Overall, we highlight the important role played by social trust in encouraging corporate R&D expenditure and enhancing innovation.