There’s an important caveat that qualifies the work highlighted today from Yufei Zhang at the Graduate School of Economics at the University of Kyoto in Japan. Viz.: “..our results can only be understood under the Chinese special institutional background, where the most important economic resources are controlled by public sectors (including governments, SOEs and state-owned banks),..”
From around 2013 the Chinese government prompted State Owned Enterprises (SOEs) to begin acquiring stakes in and fostering the growth of Privately Owned Enterprises (POEs). This provides a perfect experiment for a before and after analysis to see what happened next.
Using patent applications as the yardstick for progress there’s no doubt that POEs generally benefited from SOEs involvement. This in turn implies that China Inc. was also a net beneficiary from the initiative.
It seems then that government involvement is a net accelerator of innovation and therefore should be applauded? Not so fast. The research points out other examples around the world where results have been mixed.
In China, in this case, with these companies, at this time, SOE involvement was a net plus, no doubt. But this doesn’t mean that in other cases, with different companies, at different times the same will be true.
In the study the mechanisms driving innovation appear to have been relaxed capital constraint and improved talent structure. Both highly China-situation-ally specific conditions.
The value of the work is to highlight that government intervention to foster innovation isn’t always doomed to fail and therefore a bad thing. Like so much finance theory a pinch of ‘it-depends’ needs to be applied before declaring a policy is always and everywhere a good or bad thing.
You can review the work in full via this link Partial Nationalization and Firm Innovation.
Happy Sunday.