Equity diversification as a catalyst for Artificial Intelligence innovation: Evidence from Chinese state-owned enterprises

Abstract

China’s newly revised Company Law (2024) expands the regulatory scope in Chapter 7 from solely state-owned to all state-funded enterprises and aims to optimize their governance through various measures. This shapes the reform trajectory of equity structures in State-Owned Enterprises (SOEs), offering SOEs—typically viewed as weaker innovators—an opportunity to keep pace in the era of Artificial Intelligence (AI). Against this backdrop, we investigate the role of equity diversification in shaping SOEs’ AI innovation performance. Using the patent and equity structure data of Chinese listed SOEs during 2007–2023, we find that a 1% increase in equity diversification is associated with a 0.05% boost in AI patent applications filed by SOEs in the next year. This positive effect is achieved through: (i) reducing managerial short-termism and encouraging long-term strategic investments, (ii) directing managerial attention to emerging technologies like AI, and (iii) facilitating external learning and improving innovation efficiency. SOEs in the growth or maturity stage, operating in high-tech or competitive industries, and characterized by financial adequacy and commercial orientations benefit more from equity diversification. Additionally, this benefit is limited to AI innovation output, without affecting its quality or traditional innovation.