Unlocking Innovation: The Impact of Free Trade Zones on Corporate Innovation in China

Ruiyang Hu (), Chen Yin (), Zhijie Zheng and Sili Zhou
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Ruiyang Hu: Department of Economics, University of Macau
Chen Yin: School of Social Development and Public Policy, Fudan University

No 202414, Working Papers from University of Macau, Faculty of Business Administration

Abstract: If the domestic market operates under an inefficient economic structure, then access to foreign markets can lead to long-term benefits. In this paper, we examine the effect of free trade zones (FTZs), a progressive trade liberalization program, on corporate innovation. By using data on Chinese publicly listed firms, we find that firms operating in FTZs experience significant increases in their innovation output. These positive effects are primarily attributed to the easing of financial constraints, increased market competition, and improved access to foreign markets, even though their effects on the quantity and quality of corporate innovation can be noticeably distinct. Our empirical findings are rationalized by a simple Schumpeterian model with endogenous quality improvement, and they provide implications for policymakers to promote domestic firm growth in the global marketplace.

Keywords: Free Trade Zone; Corporate Innovation; Financial Constraint; Market Competition; Trade Liberalization (search for similar items in EconPapers)
JEL-codes: G30 G31 G32 O19 O30 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2024-06
New Economics Papers: this item is included in nep-cna and nep-int
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Published in UM-FBA Working Paper Series

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