Political Connections,R&D Incentive And Financial Performance

This study contributes to an emerging literature that critically questions the effects of political connections on the innovation incentive implemented by government and the degree to which R&D, at the center of innovation subsidy and tax incentive, boosts firm performance. The relationship among political connections, government subsidies, tax incentive, R&D intensity and firm financial performance of manufacturing private firms listed on the small-and-medium size enterprises board in China is analyzed with data from 2011 to 2013 on a three-stage structure. Finally, to control for potential endogeneity, the study further employs the instrumental variable(IV), two-stage LS and Double Residual Analysis models to make a robust test.Out investigation and study indicate the following:(1) Private firms with politically connected managers enjoy more innovation subsidy and tax benefits.(2) Both subsidy and tax benefits have mixed effects on private firms’ R&D intensity.(3) Subsidy do lead to additional innovation output, which refers to patents here, but tax benefits do not.(4) A significant positive influence of R&D expenditure on its gross margin rate and firms’ value is exhibited, but in terms of firms’ value, the positive impact of R&D decreases significantly over time which is mainly caused by the imbalanced structure of R&D expenditure.