Three essays on government-firm interactions and innovation in emerging markets

Abstract

In the last three decades, innovation research has made remarkable progress, with numerous studies explaining the drivers of firm innovation activities from different theoretical perspectives, such as upper echelon theory, knowledge-based view, and network theory. However, a series of recent studies in emerging market context highlight the important role of government in affecting firm innovation strategies and have stimulated interest in studying innovation issues from an institutional or policy perspective. To add to this stream of literature, I conduct three studies to explore, in a multifaceted way, how government-firm interactions affect firms’ R&D and innovation. The first essay examines the influence of state ownership on firm innovation in times of environmental shock. Extant research has long viewed state-owned enterprises (SOEs) as inefficient and incapable of responding to environmental changes. Challenging this conventional view, I argue that SOEs may have better innovation resilience than non-SOEs when facing environmental shock. Using the COVID-19 pandemic outbreak as an environmental shock, I find that compared with non-SOEs, SOEs suffer less severely in their patent application change during the COVID-19 pandemic, demonstrating SOEs’ superior innovation resilience. This difference in innovation resilience shrinks when firms have more government R&D subsidy or higher operating flexibility. These findings offer fresh insights into the salient value of state ownership and important implications for non-SOEs to reduce their disadvantages in times of shock. The second essay investigates how government centralized procurement policy influences firm innovation in the pharmaceutical industry. I argue that centralized procurement leads to power-imbalanced relations between the government and pharmaceutical firms, so winning firms are likely to shift their commitment from external market to internal operations. Thus, centralized procurement may foster winning firms’ operational efficiency but reduce their priority innovation (new drugs addressing urgent customer needs). Leveraging the National Centralized Drug Procurement (NCDP) in China as an exogenous shock, I employ a difference-in-differences (DID) technique and find empirical support for my predictions. I further find that the negative effect of centralized procurement on priority innovation is stronger when procurement scale or concentration is high, but becomes weaker when firms have CEOs with marketing background or have high state share. These findings reveal the multifaceted influence of government policy and provide important implications for pharmaceutical firms and policymakers. The third essay develops a conceptual framework of firm innovation development from a policy perspective. Integrating insights from innovation policy, resource management, and innovation literatures, I depict a policy framework of SOE innovation in which I argue that supply-side and demand-side innovation policy influences SOEs’ innovation process and outcome in different ways. Supply-side policy increases firms’ acquisition of innovation resources and further improves the quantity of innovation outputs. Demand-side policy affects firms’ allocation and utilization of innovation resources, which improves the quality of innovation outputs but limits the scope of innovation. These arguments provide a policy consideration of the drivers of firm innovation and provide fresh insights into how innovation policy affects firm strategy and performance.