Privatization, Financial Constraints, and Corporate Innovation: Evidence from China's Industrial Enterprises
YU Minggui, ZHONG Huijie, FAN Rui
Economics and Management School, Wuhan University; School of Accounting, Zhongnan University of Economics and Law; School of Economics and Management, Southeast University
Summary:
This paper analyzes the impact of privatization on enterprise innovation in an attempt to clarify whether privatization can promote the efficiency of state-owned enterprises (SOEs). The privatization of SOEs, in theory, has both positive and negative effects on enterprise innovation. On the one hand, privatization reduces government intervention and the policy burden of SOEs. The goal of privatized enterprises is no longer to be subordinate to the government or officials, but to maximize the value of the enterprise. At the same time, privatization alleviates the agency problem of SOEs, thus raising the level of risk-taking and enthusiasm for innovation. On the other hand, innovation has a high risk and failure rate, requiring a large amount of capital to maintain long-term investment in innovation. After enterprises are transformed from state-owned to private, they are likely to suffer from credit discrimination. Therefore, after privatization, the resource advantage of a former SOE is weakened, its financing is limited, and thus its innovation activities are restricted. This paper tests whether privatization promotes or inhibits enterprise innovation, using non-listed companies in China's industrial enterprise database from 2005 to 2011 as sample. We use the difference in differences (DID) method and take the enterprises privatized from former SOEs as the treatment group and SOEs as the control group. The results show that innovation in privatized enterprises decreases significantly. We further test whether financial constraints are an important mechanism inhibiting the innovation of privatized enterprises. The results show that innovation decreases significantly in privatized enterprises with higher financial constraints, while there is no significant change in innovation in those with lower financial constraints. This suggests that financial constraints are an important factor restricting the innovation of privatized enterprises. Finally, we find that financial constraints significantly impede innovation of privatized enterprises in regions with underdeveloped financial market, which is not apparent in regions with developed financial market. This paper makes three contributions. First, it enriches the literature on the impact of privatization on innovation from the perspective of financial constraints. Tan et al. (2015) and Zhong et al. (2016) use listed companies as samples to examine the impact of privatization on enterprise innovation, but do not reach a consistent conclusion. Importantly, both of the aforementioned papers ignore the impact of financial constraints on innovation. In this paper, non-listed companies that are more likely to be subject to financial constraints are used as the sample, and we find that financial constraints are a vital factor restraining the innovation of privatized enterprises. This paper thus expands the literature on the impact of privatization on innovation from the perspective of financial constraints. Second, this paper extends the literature on the influence of financial markets on innovation from the perspective of privatization. We find that the development of a regional financial market within a country can alleviate the adverse impact of financial constraints on the innovation of privatized enterprises. Third, this paper clarifies the controversy over privatization. The results imply that the privatization of SOEs does not necessarily succeed without a solution to the financial constraints on privatized enterprises and improvements in regional financial development to further alleviate this impediment to innovation of privatized enterprises. This paper has important policy implications. On November 1, 2018, President Xi Jinping stressed the vital role of the private economy in China's economic development at the Private Enterprise Forum, and proposed to enhance financial support for private enterprises to solve the difficulties and costs of financing of private enterprises. Given the finding that the privatization of SOEs affects enterprise innovation, this paper proves the significance of alleviating the financial constraints on private enterprises and promoting the development of financial markets to promote innovation of private enterprises.
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