Two essays on corporate innovation

Abstract

This dissertation consists of two essays on corporate innovation. In the first essay, I exploit an exogenous policy shock to investigate whether and how the policy push affects firm innovation. The Chinese 12th Five-Year Plan sets a target to double the invention patents per 10,000 people over 2011-2015, which I show stimulates less innovative provinces to catch up with their peers, thus provoking more government actions. Using a difference-in-differences approach, I find that firms in less innovative provinces file more patent applications, but the increased patents receive few citations and have little economic value. This effect is more pronounced among SOEs and for firms with large employee size. Additional tests reveal that the policy push has no impact on R&D expenditures. In contrast, it is positively related to the labor inputs in innovation activities. Finally, I find that the government reciprocates treated firms, especially SOEs, with more subsidies. The second essay investigates the impact of local inventors on corporate innovation. Using a sample of publicly listed firms in China, a country featured with concentrated corporate R&D activity and a household registration system restraining inventor mobility, I document that firms surrounded by more inventors produce high-quality patents and breakthrough innovations. Skilled labor supply and the escape of competition are two possible channels through which local inventors stimulate firm innovation. Further analyses show that inventor quality strengthens local inventors' impact, and the human capital accumulation is positively related to local inventors. Surprisingly, remote inventors significantly decrease patent quality. These two studies shed new light on the role government and local inventors played in corporate innovation. The findings show that firms adopt a strategy to trade quality for quantity under government pressure. Given no technological breakthroughs in the policy-induced patents, the potential gain in economic development and firm growth could be less than desired. Besides, government officials allocate subsidies on the condition that firms respond to their appeal to boost patent counts, which may lead to the misallocation of innovation resource. On the other hand, firms could enhance their innovation performance by establishing research and development facilities in regions with rich talents. Alternatively, the government can loosen inventor mobility restriction, thus reducing the adverse effect of firm headquarter location on innovation activities.