Kenneth G. Huang

Abstract

The trend of state involvement in private firms in China is increasing, which represents the country’s major policy reversal of the early era of market reform and privatization of firms. Economists and policymakers are concerned about the rising state influence and how it can tamper with the fruitful economic development and innovation activities of private firms resulting from decades of market-oriented reform and privatization. We explore whether state entry into privately owned enterprises (POEs) affects the innovation performance of POEs. We show that state entry has a significant and negative impact on the quantity of general patented innovations but has little effect on the novel patented innovations produced by POEs. We also find that in emerging strategic industries identified by the state, POEs can continue ramping up the quantity of general innovations despite significant state entry; POEs with a high level of accumulated technological capabilities in producing high novelty innovations continue to generate a greater proportion of novel innovations. These findings yield important strategy implications for firms operating in transitional economies, such as China, and policy implications for governments seeking to leverage the technological capabilities and innovations of market-oriented POEs for the overall development of the economy.