Political connections,corporate innovation and entrepreneurship: Evidence from the China Employer-Employee Survey (CEES)

In this paper, we attempt to reconcile the mixed effects of political connections on corporate innovation. Using the China Employer-Employee Survey (CEES), we find political connections contribute to innovative activities for those firms with innovative entrepreneurs but impedes innovative activities for those without innovative entrepreneurs. After solving the endogeneity problems and correcting the sample selection bias, the baseline results do not change much. Moreover, we find political connections can help firms obtain economic benefits such as tax preference and government subsidies which, however, are utilized by firms to increase fixed asset investment. But such positive effect of political connections on fixed asset investment greatly reduces when the firm's entrepreneur has a strong spirit of innovation. These results provide a reasonable explanation for the change in the direction of the effect of political connections on corporate innovation. This paper succeeds in reconciling the mixed effects of political connections on corporate innovation by taking the entrepreneur's innovative spirit into account.