Working Papers

The Financial System




State Ownership, Political Connection, and Innovation Subsidies in China

Author:Hong Cheng, Hanbing Fan, Takeo Hoshi and Dezhuang Hu


We examine how a firm’s political connection measured by the membership of its CEO in the People’s Congress (PC) or Chinese People’s Political Consultative Conference (CPPCC) influences its likelihood of receiving the innovation subsidies given by the state. We find that politically connected firms are more likely to receive innovation subsidies. The political connection measured in this way is found much more important than state ownership in explaining the allocation of innovation subsidies. We also investigate if the firms that receive innovation subsidies are more innovative, productive, or profitable. Our results show that the firms that receive innovation subsidies file and receive more patents, but that their patents are not necessarily of high quality. They do not have higher productivity or profitability, either. The results collectively suggest politically induced inefficiency in the allocation of innovation subsidies in China.