The Cost of Connectivity: The Effect of Indirect Board Connections on R&D Investment in China

Abstract

This study investigates the impact of indirect board connections on research and development (R&D) investment in Chinese listed private firms. Using handcollected data, we measure indirect board connections through the network analysis metric of betweenness centrality. Our findings show a significant negative relationship between betweenness centrality and R&D intensity, indicating that firms with more indirect board connections invest less in R&D. This effect is explained by information-based and rivalry-based theories, which emphasize the heightened risk of information leakage associated with indirect ties. Further analysis shows that the negative impact is stronger in more transparent firms, suggesting their heightened exposure to information leakage. Additionally, board connections involving directors with political social capital exacerbate the negative effect on R&D investment. This research offers new insights into how board networks influence corporate innovation strategies, particularly in the Chinese context, where social capital and informal institutions play a critical role in business.

Keywords: board social capital, centrality, firm opacity, indirect ties, information leakage, R&D investment, political social capital