Central Judicial Inspector: Establishment of Circuit Tribunals and Corporate Innovation in China

Abstract

The growing localization of the judicial system has been a critical concern in China's justice reform, and its consequence on entrepreneurship receives little attention. We evaluate the effects of judicial reform on the innovation of private-controlled listed firms in China using the transformation of judicial decentralization: inter-provincial circuit tribunals. Results show that the establishment of circuit tribunals significantly promotes innovation quantity and quality. The legal reform affects firms' incentives to innovate by increasing access to long-term bank loans and enhancing risk tolerance. The positive effect is more pronounced for firms with weaker political ties, a longer distance from the Supreme People's Court, and a better market institution for the private sector. Our findings provide policy implications of judicial checks and balances for promoting regional innovation activities in emerging countries.

Keywords: Judicial institutions, corporate innovation, intellectual property protection

JEL Classification: K40, O31, O32