| Abstract: | We examine the effects of a specific Chinese governmental policy change, and assess how it has impacted firm innovation. To address potential endogeneity concerns, we use the policy change as a quasi-natural experiment, and explain the exogenously caused variations. We also use a “difference-in-differences” approach to compare innovative activities of Chinese firms with those of matched U.S. peers, and find that the policy change had a positive effect on Chinese firms' research spending, as measured by research intensity. We show that Chinese firms increased their research spending in response to the strategic shift by the government after 2008, relatively outpacing their U.S. peers during the same time period. Chinese companies have not overtaken their U.S. peers yet, but they have reduced the gaps between them. |
