Does Political Corruption Impede Firm Innovation? Evidence from the United States

Abstract

We examine how local political corruption affects firm innovation in the United States. We find that firms located in highly corrupt areas are less innovative as measured by their patenting activities. The results are robust to the inclusion of a broad set of regional characteristics, instrumental variable analysis, matching analysis, difference-in-differences test, and alternative proxies for local corruption. Further analysis shows that reduced innovation incentives due to high extortion risk and decreased threat of competition could be the possible economic channels through which corruption affects innovation. Overall, our results indicate that local political corruption impedes corporate innovation in the United States.

Financial reporting and corporate innovation: a review of the international literature

“…Using a large panel of US data, the authors find evidence supporting a negative relation between local corruption and innovation. Huang and Yuan (2021) also investigate the same research question using the same US state-level corruption data and find similar evidence. Flammer and Kacperczyk (2016) document a significant increase in corporate innovation following the adoption of non-shareholder constituency statutes, a finding consistent with the notion that stakeholder orientation fosters a long-term horizon focus in decision-making.…”

Migrant entrepreneurs and firm innovation

“…Government intervention imposes rules and restrictions that create opportunities for rent-seeking by bureaucrats, which in turn has a negative impact on firm innovation. Lin et al (2010) show that informal payments to government officials are not conducive to corporate R&D. Similarly, Huang and Yuan (2021) find that political corruption impedes firm innovation. Xu and Yano (2017) show that anti-corruption efforts prompt firms to increase their investment in R&D and generate more patents.…”

CEO Overconfidence and Corporate Innovation Outcomes: Evidence From China

“…Based on prior literature, we control for firm size, financial characteristics, corporate governance characteristics, stock market trading characteristics, nature of ownership, and other characteristics of the enterprise. We add control variables to capture firm size, performance effects and other financial characteristics, such as asset size (SIZE), the asset liability ratio (LEV), capital intensity (INTEN), fixed assets (FIXED_ASSET), operating income before depreciation (ROA), net operating cash flow (CASH_FLOW), retained earnings ratio (RE_EARNING), the growth rate of operating income (GROWTH), annual earnings per share (RET), the annual volatility of the stock price (VOLATILITY), ownership concentration (OWNCON), and the executive shareholding ratio (EXCHH) (Frost, 1997;Healy and Palepu, 2001;Ben-Amar and Zeghal, 2010;Lee et al, 2016;Loukil et al, 2020;Huang and Yuan, 2021). In addition, we add other control variables, such as the percentage of independent directors (INDEP) (Jiraporn et al, 2018) and the number of board meetings held each year (MEETING), to capture the firm's internal control level.…”