Working Paper: CEPR ID: DP14399
Authors: Andrés Rodríguez-Pose; Min Zhang
Abstract: Does the variation in the quality of local government institutions affect the capacity of firms to innovate? This paper uses a unique dataset that combines the specific features of 2,700 firms with the institutional and socioeconomic characteristics of the 25 cities in China where they operate, in order to assess the extent to which institutional quality – measured across four dimensions: rule of law, government effectiveness, corruption, and regulatory quality – affects both the innovation probability and intensity of firms. The results of the econometric analysis show that poor institutional quality in urban China is an important barrier for firm-level innovation. In particular, a deficient rule of law, high corruption, and a weak regulatory quality strongly undermine firm-level innovation. The role of these factors is far more limited in the case of innovation intensity. Better institutions also reduce the amount of time firms spend dealing with government regulations in order to facilitate innovation. The results also indicate that the cost of weak institutions for innovation is higher for private than for state-owned firms, at least in the early stages of innovation. In general, differences in institutional quality generate local urban ecosystems that impinge on the propensity of firms to innovate.
Keywords: innovation; institutions; government quality; firms; cities; China
JEL Codes: H1; O3; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local government quality (H70) | firm-level innovation (O31) |
| Poor institutional quality (O17) | propensity of firms to innovate (O31) |
| Better institutions (O43) | time spent on regulations (L51) |
| Weak institutions (O17) | innovation (O35) |
| Cost of weak institutions (O17) | greater for private firms than state-owned firms (P31) |
| Institutional quality (I24) | propensity to innovate (O31) |
| Institutional quality (I24) | intensity of innovation (O31) |