Institutional Environment And Firm Innovation

As the deterministic factor of technological progress, innovation has an important influence on the sustained development of economy. China has developed extensive economy with resort to its advantages in resources and labor vigorously for a long time. This kind of development model ignored the critical role of technology, leading to the situation of weak independent innovation capacity. Since firm’s innovative activities are determined by institutional environment endogenously, institutional environment has a big impact on firm’s incentive to innovate. However, the institutional environment in our country is not perfect, and it also varies greatly across regions in this special period of transition. Thus, many scholars came to examine the influence of institutional environment on innovation from the perspective of institutional economics. However, the difficulty of such research lies in the quantization of institutional environment. Some of the existing studies used the marketization index conducted by Gang Fan to examine the regional institutional environment’s impact on firm innovation. However, macro indexes ignore the individual heterogeneity of institutional environment, and it might result in biases in estimation of individual behaviors. Besides, some researchers also studied the micro institutional environment’s influence on innovation. However, most of them simply examined the influence of property rights protection and contract enforcement institution on firm innovation, and their measurements of institutional environment are far from comprehensive. What’s more, related literatures mostly examined institutional environment’s impact on R & D inputs rather than R&D outputs. This may affect the robustness of conclusion. Our study aims to examine the micro institutional environment’s impact on firm’s R & D intensity and R&D output from more aspects using firm-level data.Specifically, employing a 2012 enterprise survey data sample from World Bank which covered 2848 Chinese firms in 25 big cities, this thesis empirically examines the impacts that the three dimensions of institutional environment, i.e. government intervention, property rights protection and contract enforcement institution, have on firm’s R&D intensity and R&D output. In terms of government intervention, we use the time that firm’s executives spent with government officials and the ratio of informal payments as proxy indicators of indirect and direct cost of government intervention respectively. Based on this, we further examine their different influence on innovation. This is the biggest innovation point of this thesis. The empirical results show that there exist an inverted U-shaped curve relationship between government intervention and firm innovation, and a proper degree of government intervention promotes innovation, but higher level of government intervention blocks innovation. With regard to property rights protection, we emphasize the effects of factors except for government exploitation on firm innovation, using the ratio of security payment as proxy indicator of property rights protection. We find that firm’s security payment ratio is positively correlated with firm innovation, which indicates that a lower level of property rights protection promotes innovation. And this unusual finding has much to do with our low capability in self-innovation. Firms may prefer to innovate through technological imitation when restricted by self-innovation capability and capital. However, strict property rights protection hinders imitation, thus it blocks firm innovation. In terms of contract enforcement institution, since contract enforcement institution reflects the development of financial institutions, hence reflects the external finance of firm further. We select firm’s percentage of working capital financed by bank loans as the proxy indicator of development of financial institutions as well as contract enforcement institution. The empirical results reveal that better contract enforcement institution facilitates firm innovation through external finance. Furthermore, in order to overcome the potential endogeneity problem, we conduct discussions on the potential endogeneity problem of institutional environment variables by using the city-industry averages of institutional environment variables as their instrumental variables respectively. Finally, we further test the robustness of our results by using substitutive indicators of institutional environment variables.