Do political ties facilitate or inhibit firm innovation in China? An examination of the institutional structure

Abstract

Drawing on political connection literature, we distinguish two types of political ties, horizontal (i.e., block ties with regions) and vertical (i.e., line ties with departments), and examine their effects on firm innovation. Based on a panel of Chinese public-listed private firms, we find that firms whose executives have block ties innovate much less than those without such ties, particularly when they are located in regions with less developed markets. In contrast, line ties increase firm innovation, particularly when the firms are located in regions with more developed markets. However, it also shows that the effect of line ties is attenuated when regional governments place a greater emphasis on innovation. Our research contributes to the literature on the relationship between political ties and firm innovation, the heterogeneity of political ties, and the interplay between political ties and the institutional environment.