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Financing R&D in Chinese private firms: Business associations or political connection?

Dongyang Zhang and Yumei Guo

Economic Modelling, 2019, vol. 79, issue C, 247-261

Abstract: Using a new and unique dataset of Chinese private firms, this paper explores how private firms access bank loans to finance innovative activities. The results reveal that political connection, rather than membership in a government-controlled business association, largely determines private firms' innovations by providing access to bank loans. Furthermore, the “grease-the-wheels” mechanism of political connection is stronger if the firms are more constrained financially, located in regions with low levels of financial development, or located in regions with relatively under-developed institutional environments. Finally, cash flow, used to measure internal financing, and trade credit, used to measure informal financing, are important alternative financing channels and support firms' R&D investments. Our paper implies that China's government needs to continue fostering a good financing environment and supporting innovation activities.

Keywords: R&D investment; Bank loans; Business association; Political connection; Financial constraints (search for similar items in EconPapers)
JEL-codes: O30 L22 G21 D73 (search for similar items in EconPapers)
Date: 2019
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