Institutional Environment, Rent-seeking And Firm Innovation

Over the past thirty years of China, the rapid rise of china’s economic growthbeyond the expectations of almost everyone. To be fair, under the background of currentinstitution, the rapid of China’s economic growth is a challenge to traditional economictheory, which is known as “growth miracle”. Although fiscal decentralization theoryand political tournament theory provide interpretation of China’s growth miracle insome measure, we should realize that behind China’s economic growth miracle: themajor driving forces of China’s economic growth are high saving rate and highinvestment, but innovation has not played at its potential. In the long term, the extensiveeconomic growth pattern is not the lasting power to push China’s sustainable economicdevelopment, oppositely, which not only makes Chinese society bear costly governancecost, but also suppress firm innovation for a long time. Therefore, constructingfavorable institutional environment, promoting firm innovation and transformingeconomic growth pattern become one of the primary tasks of Chinese government, alsoare the important issue to achieve sustainable economic development. However, thevarious formal institutions of China at present have not been completely set up,innovative firms are faced with lots of risks. For this reason, under the currentinstitutional environment, the government of China should improve which institution inorder to promote firm innovation effectively. Meanwhile, are bribe and other corruptactivities able to become an effective informal institution under current institutionalenvironment to against the risk of innovation?Based on the above mentioned problems, the works of this paper are divided into atleast two aspects: the first aspect is that, based on the two types factors, which areinstitutional environment and corruption, we consider the effects of institutionalenvironment and corruption on innovative output, card the chain effect of institutionalenvironment-corruption-firm innovation from integrated viewpoint, thus analysis howinstitutional environment and corruption affect firm innovation overall, and therelationship between corruption and firm innovation under considering the interferenceof institutional environment. The other aspect is that, using macro, micro data andsurvey data of China, we conduct an empirical analysis to test some propositions whichare elicited from mechanism analysis, in order to search the experimental evidence fromChina, and the incentive factors of firm innovation, and this has important significance to master firm innovative behaviors of China, and then provide reasonable guidance tothe transformation and upgrading of firm and even the whole industry in China.Theoretically, first of all, this paper provides the analysis about the mechanism ofinstitutional environment acting on firm innovation, and which manifests that theinstitutional environments determine the incentive structures which are provided bydifferent types of economic activities. Rational entrepreneur would trade off theearnings and costs of various economic activities according to the economicenvironments of economic entity, and then choose the activities to maximize their owninterests. Secondly, we analysis the mechanism of corruption acting on firm innovation,and which manifests that moderate bribe and other corrupt activities increase thetransaction cost of firm innovation, but it helps firm to avoid the red tape of bureaucracy.Just as auction mechanism, license grant and official authorization based on themoderate bribe can achieve Pareto suboptimal of the resources allocation. It is moreimportant that, the non-excludability and non-competitiveness of firm innovativeproduct make the firm need to seek “Political asylum” through moderate bribe andother corrupt activities under the defective institution of economy, to protect theinnovative product earnings from erosion.However, higher amount of bribes are likely to distort resource allocation, andincrease the transaction cost of firm innovation. Moreover, the commitment based onthe higher amount of bribes and other corrupt activities do not have legal footing, whichmakes higher level corrupt activities with ex post opportunism and randomness, and itincreases the risk of firm innovation, and inhibits the force of firm innovation. Lastly,we analysis the relationship between institutional environment and corruption, and findthat good institutional environment raises the transaction cost of corruption, andprovides a rule-based for the normal conduct of economic activities, and now bribe andother corrupt activities would only damage the normal rules of economic activity, andrestrict economic freedom. On the other hand, when institutional environment restrictthe economic freedom, corruption may help entrepreneurs to avoid burdensome rules,enhance the efficiency of economic operation.Based on the above theoretical analysis, the empirical research conclusions of thispaper at least the following4point:Firstly, we provides a firm-level empirical analysis on the ways in whichcorruption affects firm innovation using survey data of World Bank about institutionalquality of Chinese enterprise operation in2012. This study finds that, there is an inverted U-shaped curve relationship between corruption and firm innovation; it meansthat a certain degree of corruption is grease for firm innovation, but higher level ofcorruption is stumbling block for firm innovation. Furthermore, this study also revealsthat government guarantee and banking leading are the effective channels for theinfluence of corruption on innovation.Secondly, using the macroeconomic data at provincial-level, considering themarketisation index as proxy index of institutional quality, and the threshold variable ofcorruption acting on firm innovation, then take nonlinearity of the interaction betweenvarious factors into the econometric framework. The conclusion of the empiricalresearch conclusions show that, corruption has a negative influence on firm innovation,but the negative effect would have nonlinear change with the improvement ofinstitutional quality. It means that, the single threshold effect of institutional qualitymakes the relationship between corruption and firm innovation change non-linearly,when institutional quality remains at lower regime, the spread of corruption will providea fatal blow to firm innovation. However, when institutional quality remains at higherregime, the blow of corruption spread to firm innovation will be greatly weakened, eventhere is no obvious blow. Moreover, We also find that there is a big regional differencesof institutional quality, that is most of the provinces in eastern area have crossed thethreshold of institutional quality, but in the middle area and western area, especiallywestern area, most provinces remains into the threshold of institutional quality.Thirdly, using China’s industrial enterprise database related data from1998-2007and a hand-collected data of official tenure, the empirical study about theeffect of local official tenure and corruption on firm innovative behaviors. The resultsshow that, there is an inverted U-shaped curve to depict the relationship between localofficial tenure and firm innovation; meanwhile, there is also a U-shaped curve to depictthe relationship between corruption and firm innovation. It is more important that, localofficial tenure negatively regulates the relationship between corruption and firminnovation. Furthermore, we find that the relationship between corruption and firminnovation will show the dynamic complex relationship with marketization, industrialnature, ownership structure and officials characteristics.Fourthly, using China’s industrial enterprise database related data from1998-2007and a hand-collected data of official tenure, the empirical study about the effect of thegeographical rotation of local official and corruption on firm innovative behaviors. Theresults show that, the geographical rotation data of local official have negative effect on firm innovation; meanwhile, there is a U-shaped curve to depict the relationshipbetween corruption and firm innovation. It is more important that, the geographicalrotation of local official negatively regulates the relationship between corruption andfirm innovation. Furthermore, we find that the relationship between the geographicalrotation of local official, corruption and firm innovation will show the dynamic complexrelationship with marketization, industrial nature, and ownership structure and officialscharacteristics.