Central government Ownership, geographic Distance, and firm Innovation: Evidence from Chinese State-owned enterprises

Abstract

Previous studies have suggested that state ownership has mixed impacts on SOE’s innovations. We highlight one potential reason for the inconsistency in previous findings by uncovering the heterogeneity within state ownership. Specifically, we suggest that central government ownership provides SOEs with more resources and makes the firms’ strategies closely aligned with the government’s strategic priorities than other state ownership, leading to better innovation performance. However, we demonstrate that this positive effect will diminish as the geographic distance between the SOE and the central government increases due to increased information asymmetry. Our findings suggest that this negative impact of geographic distance might be mitigated by CEOs’ perceptions of the value associated with developing innovations, resulting from their technology human capital and equity ownership. Using data collected from listed Chinese SOEs, we find robust evidence supporting our theory.