Political Connection and Dynamic Adjustment in R&D Investment: Evidence From Chinese Manufacturing Firms

ABSTRACT In the rapidly evolving technological landscape, effective Research and Development (R&D) investments are critical for companies aiming to maintain competitiveness. This paper examines the dynamic adjustments of R&D investments in firms, with a focus on the role of political connections. We analyze a dataset of Chinese manufacturing firms from 2010 to 2019, employing a partial adjustment model to assess how these firms align their R&D expenditures with optimal targets. Our findings reveal that politically connected firms, while still falling short of their targets, demonstrate a significantly faster adjustment speed compared to their non‐connected counterparts. This advantage is primarily attributed to enhanced access to government subsidies and reduced costs of debt and equity financing. This study provides valuable insights for policymakers and firms in developing countries, elucidating how political relationships can shape innovation strategies and outcomes.