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      Corruption, Government Subsidies, and Innovation: Evidence from China
      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.
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      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
      Josh Lerner
      Jacob H. Schiff Professor of Investment Banking
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