Corruption, Government Subsidies, and Innovation: Evidence from China

69 Pages Posted: 19 Sep 2018

See all articles by Lily H. Fang

Lily H. Fang

INSEAD - Finance

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Chaopeng Wu

Xiamen University - School of Management

Qi Zhang

Xiamen University

Multiple version iconThere are 2 versions of this paper

Date Written: September 17, 2018

Abstract

Governments are important financiers of private sector innovation. While these public funds can ease capital constraints and information asymmetries, they can also introduce political distortions. We empirically explore these issues for China, where a quarter of firms’ R&D expenditures come from government subsidies. Using a difference-in-differences approach, we find that the anti-corruption campaign that began in 2012 and the departures of local government officials responsible for innovation programs strengthened the relationship between firms’ historical innovative efficiency and subsequent subsidy awards and depressed the influence of their corruption-related expenditures. We also examine the impact of these changes: subsidies became significantly positively associated with future innovation after the anti-corruption campaign and the departure of government innovation officials. Please see https://ssrn.com/abstract=3251843 for the Appendix to this paper.

Suggested Citation

Fang, Lily H. and Lerner, Josh and Wu, Chaopeng and Zhang, Qi, Corruption, Government Subsidies, and Innovation: Evidence from China (September 17, 2018). Harvard Business School Entrepreneurial Management Working Paper No. 19-031; Harvard Business School Finance Working Paper No. 19-031. Available at SSRN: https://ssrn.com/abstract=3251449 or http://dx.doi.org/10.2139/ssrn.3251449

Lily H. Fang

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Josh Lerner (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chaopeng Wu

Xiamen University - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
China

Qi Zhang

Xiamen University ( email )

Xiamen, Fujian 361005
China

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