Public governance, corporate governance, and firm innovation: An examination of state-owned enterprises

• Main Authors: JIA, Nan, HUANG, Kenneth G., ZHANG, Cyndi Man
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Corporate governance; public governance; innovation; quality of government; state-owned enterprises (SOEs); Business Law, Public Responsibility, and Ethics; Strategic Management Policy; Technology and Innovation
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6549; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7548/viewcontent/amj.2016.0543.pdf
• Institution: Singapore Management University

We examine how corporate and public governance shape an important type moral hazard in innovation which is that agents pursuing the quantity of innovation at the expense of the novelty. We theorize that both better corporate governance tools that regulate agents (including better alignment of agents’ private incentives and stronger monitoring), and higher-quality public governance that regulates the principals of state-owned enterprises (SOEs) reduce this moral hazard. Furthermore, we argue that higher-quality political governance enhances the functioning of better corporate governance tools in further reducing this moral hazard in innovation, thus creating interdependence. We test our theory in the context of Chinese SOEs which responded to the state’s pro-innovation policies that disproportionately relied on quantifiable outcomes (e.g. patent counts) to assess innovation performance. Our difference-in-differences estimates provide overall support for the hypotheses. To innovation research, this study expands our knowledge of how agency risk affects innovation—but above and beyond the common concern of underinvestment in innovation across the board, by distinguishing the differential consequences on the quantity and the novelty of innovation. To corporate governance research, this study shows that how conventional corporate governance tools shape firms’ innovation outcomes is dependent on public governance in the institutional environment.