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04 Oct 2018Working Paper Summaries

Corruption, Government Subsidies, and Innovation: Evidence from China

by Lily Fang, Josh Lerner, Chaopeng Wu, and Qi Zhang

Governments subsidize a growing number of innovation efforts, many of which may face the challenge of corruption. Using Chinese data, this study finds corruption-related distortions in government R&D subsidies, which diminished after the 2012 anti-corruption campaign and rotation of provincial officials. It provide insights for designing effective R&D subsidy programs.

Author Abstract

Governments are important financiers of private sector innovation. While these public funds can ease capital constraints and information asymmetries, they can also introduce political distortions. We empirically explore these issues for China, where a quarter of firms’ R&D expenditures come from government subsidies. Using a difference-in-differences approach, we find that the anti-corruption campaign that began in 2012 and the departures of local government officials responsible for innovation programs strengthened the relationship between firms’ historical innovative efficiency and subsequent subsidy awards and depressed the influence of their corruption-related expenditures. We also examine the impact of these changes: subsidies became significantly positively associated with future innovation after the anti-corruption campaign and the departure of government innovation officials.

Paper Information

Full Working Paper Text
Working Paper Publication Date: September 2018
HBS Working Paper Number: HBS Working Paper #19-031
Faculty Unit(s): Finance; Entrepreneurial Management

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Josh Lerner

Jacob H. Schiff Professor of Investment Banking
Unit Head, Entrepreneurial Management

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