How state ownership affects corporate R&D: An inverted‐U‐shaped relationship

Tong Fu, Ze Jian and Youwei Li

International Journal of Finance & Economics, 2023, vol. 28, issue 3, 3183-3197

Abstract: The existing literature provides mixed evidence about the effect of state ownership on corporate research and development (R&D). As this article hypothesizes, state ownership has a positive institutional effect on the investment environment for R&D and a negative institutional effect on firm operations for innovation. With evidence from China, we confirm that state‐owned shares have an inverted‐U‐shaped causal effect on corporate R&D and that having the state as a minority shareholder is optimal for corporate R&D. We further document that, when a firm's R&D investment at least equals reinvestment of its profit, the threshold for state‐owned shares is larger than it would be otherwise. Therefore, we justify the contradictory institutional effects of state ownership with an inverted‐U‐shaped relationship, thereby enhancing understanding of institutions and state ownership for corporate finance.

Date: 2023
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