How Does State Ownership Affect Firm Innovation? Evidence from Chinese Manufacturing Firms

Abstract This paper studies innovation differentials among state-owned firms (SOEs) and privately-owned firms (POEs) in China’s manufacturing sector. It identifies and quantifies two channels that mediate the effects of state ownership on firm innovation: (1) a human-capital channel promoting innovation capacity, proxied by higher SOE skilled-worker shares; and (2) an institutional-support channel mitigating firm financial constraints, proxied by higher SOE subsidies and lower SOE credit costs. Key findings are that SOEs have higher R&D intensity, apply for invention patents at a higher rate per unit of sales, and are more likely to apply for invention patents than POEs; however, citation metrics of SOE and POE invention quality are equal. Positive SOE-POE invention-patent rate differentials are solely attributable to mediated channels. Positive SOE-POE R&D intensity and invention-patent probability differentials also reflect “direct” effects of state ownership, potentially attributable to business-environment stability. Productivity analyses show that China’s 2009–2010 economic stimulus, by awarding state support disproportionately in favor of SOEs, misallocated resources, harming efficiency: Had the same support been awarded to POEs, there would have been larger increases in the invention-patent rate and productivity of China’s manufacturing sector.