Pyramidal structure, vertical interlock, and corporate innovation

Abstract

We examine how pyramidal group structure and vertical interlock, i.e. the CEO's or board chair's engagement in an upper-level firm within the group, affect firm innovation. Using a sample of listed firms in Chinese stock markets, we find that firms at lower levels of the group pyramid, i.e., further away from the ultimate parent, are less innovative in terms of research and development (R&D) expense and patent applications than ones closer to the top. Moreover, a firm's innovation activity is influenced by the vertical interlock, whose impact is heterogeneous across the group pyramid. In general, a vertical interlock enhances innovation when the firm is located at a lower level in the group, but it deters innovation when the firm is close to the ultimate parent.