Political Connections and Corporate Innovation: A Stepping Stone or Stumbling Block?

Abstract

This paper explores the nonlinear impact of political connections on corporate innovation by constructing an index of the intensity of political connection using a dataset of A-share listed firms over the period 2008-2017. Results show that the intensity of political connection has an inverted U-shaped impact on corporate innovation. Meanwhile, this inverted U-shaped relationship is more pronounced for firms in the eastern or northern regions, for state-owned enterprises, and for firms in the growth stage. Further analyses indicate that innovation subsidies and rent seeking play the mediating effects on the inverted U-shaped relationship. Marketization negatively moderates the relationship, while anti-corruption campaign in China positively moderates it. These findings strongly confirm that the different intensities of political connections have different impacts on corporate innovation, which makes the seemly contradictory conclusion in existing literature clear.

Keywords: political connections, corporate innovation, inverted U-shaped relationship