The long-term effect of western customs institution on firm innovation in China

Abstract

Can cultural norms fostered by historical institutions affect today’s firm innovation? We analyze a historical experiment in China in 1902, when the foreign-run Chinese Maritime Customs Service (CMC), known for its efficient and transparent governance, took over some of the Chinese Native Customs stations and improved their governance. Using a large data set of contemporary industrial firms in China and an IV strategy that exploits the takeover criterion for identification, we show that firms in locations historically affected by the CMC rules exhibit higher innovation intensities today, which can be attributed to the persisting norms of honesty and lawfulness embedded in the CMC institution. They reduce corruption and misconduct for local governments and firms, even though the formal CMC institution was abolished in 1949.