Political Connections, Competition, and Innovation: Quasi-Experimental Evidence from Chinese Firms

Lei Cheng and Zhimin Li

Economic Development and Cultural Change, 2023, vol. 71, issue 3, 819 - 862

Abstract: This paper studies the causal impact of political connections on innovation. Using a unique hand-collected data set of sudden deaths of politically connected independent directors (i.e., retired government officials) in Chinese firms, we find that an unexpected loss of political connections increases a firm’s patent applications by 34% (14 patents). The innovation response is more pronounced in firms with stronger connections: when the connected directors held higher-level bureaucratic positions or when firms operate within their geographical jurisdictions. Upon losing political connections, firms face higher competitive pressure and divert resources from rent seeking into innovation investment. Our findings highlight the role of competition in the substitution between political connections and innovation, particularly in settings where formal institutions are weak.

Date: 2023
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