Political Connections, Debt Financing and Firms’ R&D Investment – Evidence from Listed Companies in China

Abstract

On the basis of listed company's date from 2009 to 2011, this paper empirically studies the influence political connections and debt financing have on firm's research and development investment. It is suggested that there is an inverse correlation between the ratio of debt financing (bank loans) and the research and development intensity. By occupying a large amount of short-term debts, firms fail to reverse the debt financing constraints, and the key still lies in the deficiency of support from long-term debt. Although political connections bring certain longterm debt resources to firms, they fail to generate significant "resource effect" and drive firms' research and development investment as expected. On the contrary, political connections also bring "extrusion effect", to which firms should pay enough attention and introspect themselves.