There’s long been a debate about, particularly in developing markets, whether or not political connections help or hinder the development of the corporate sector? On the one hand it’s been established politically connected entities have better access to credit and a generally lower cost of capital. On the other hand its also been found companies with friends in high places tend to be rent seekers which, especially in the context of a developing market, is an especially corrosive activity.
The paper highlighted this week breaks new ground in the debate and provides an unequivocal answer to one of the most important questions; do politically connected companies spend more on R+D and are they therefore better innovators than peers with fewer friends in higher places?
Xiuting Qin and Xueyong Zhang, both from the School of Finance at the Central University of Finance and Economics in Beijing, looked at all listed A-shares from the period 2010 to 2015 during which time a unique event took place. In 2013, a then new kid on the block, Xi Jin Ping as part of his anti-corruption campaign ordered cadres to give up independent corporate directorships. From 2013 to 2015 the percentage of companies with strong political ties fell from 41.5% to 18.4% producing a unique-in-the-world dataset of before, after and recalcitrant politically connected companies.
Measured by the number of patents filed (a crude yardstick the researchers admit but better than change in R+D spend) there can be no doubt, companies who found themselves newly unconnected rolled up their sleeves, donned their pocket protectors and go to the business of innovation.
The paper provides the clearest proof to date that government involvement in business stifles development and has important implications not only for China’s future development (government is still way too involved if less directly so today) but other developing economies as well.
You can access the paper via this link De-Politicization and Innovation.
Happy Sunday