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Published in: Journal of Chinese Political Science 3/2023

16-05-2022 | Research Article

Political Turnover and Innovation: Evidence from China

Authors: Xiaoming Zhang, Weijie Luo, Di Xiang

Published in: Journal of Chinese Political Science | Issue 3/2023

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Abstract

This paper explores cycles in innovative outcomes corresponding with the timing of political turnover. Using data on local government officials and firm level innovation activities in China, firm innovation is found to be negatively associated with a turnover of local political leaders. We examine several potential explanations and find evidence supporting the premise that political turnover reduces firms’ incentives to innovate until the uncertainty is resolved. This paper also indicates that local political turnover significantly inhibits firms’ research and development investment, government subsidies, and expansion decisions, leading to less innovative outcomes. Moreover, reductions in innovation are greater in cities with higher levels of government expenditure or intellectual property rights trials, or in smaller firms or non-state-owned enterprises during the rotation of local government leaders.

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Appendix
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Footnotes
1
Teets and Noesselt [41] explore the state of the field for governance and policy innovation in China.
 
2
A series of recent literature (i.e., [15, 28, 34]) investigates the relationship between policy uncertainty on firm performance in China, while others attempt to test the Porter hypothesis in China [37]. In the meantime, Zhang et al. [47] emphasize the importance of local leaders during the prevention and control of COVID-19 in China and Luo [26] argues that the professional experience of local leader has a key influence on China’s local government size, under the premise of frequent political turnover of local officials in China [27].
 
3
The related patent data for Chinese firms are from the China Stock Market & Accounting Research (CSMAR) Database.
 
4
In addition to the domestic achievement, China also had an impressive performance at the international level. For instance, the number of “Patent Cooperation Treaty” patent applications reached at 5l,000 in 20l7, ranking second in the world.
 
5
In Appendix Table 7, we also find that the relationship holds more firmly in cities with a turnover in municipal party secretary than mayor turnover, in support of the argument that the municipal party secretary plays a more significant role in local government.
 
6
Data on firm-level basic information (and those mentioned below) are also extracted from the CSMAR database.
 
7
Data on those city-level control variables are taken from the China City Statistical Yearbook.
 
8
Data on the quality of patents are also obtained from the CSMAR database.
 
9
In Appendix Table 8, we find that when party secretary and mayor are rotated in the same year, this can create a particularly substantial shock compared to the rotation of either position. In this table, we use Simultaneous turnover (0 = neither turnover, 1 = turnover in either municipal party secretary or mayor, 2 = both turnover) as the key independent variable instead of Political turnover. As expected, the rotation of both posts has a greater effect on the government-business relationship compared to the turnover of one position.
 
10
Since Xi Jinping became the General Secretary of the Communist Party of China in China, enormous political changes has taken place in China (see [18]).
 
11
We also explore how the estimated results change with the level of marketization in Appendix Table 9. In the areas with a higher level of marketization, the number of patent applications (in particular, the number of invention patent applications) falls further after the rotation of local leader. Typically, firms located in a place with lower level of marketization are more likely to establish informal relationships with local government (i.e., bribery, therefore, political turnover has an impact on these informal relationships, and firms will face greater uncertainty during the period of turnover, leading to a significant decline in innovative output. Our results show that the rotation of local leader does not affect informal relationships, since political resources (provided by the local leader, who might have rotated) continue to play a key role in the success of firms.
 
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Metadata
Title
Political Turnover and Innovation: Evidence from China
Authors
Xiaoming Zhang
Weijie Luo
Di Xiang
Publication date
16-05-2022
Publisher
Springer Netherlands
Published in
Journal of Chinese Political Science / Issue 3/2023
Print ISSN: 1080-6954
Electronic ISSN: 1874-6357
DOI
https://doi.org/10.1007/s11366-022-09800-8

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