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Regulation and product innovation: the intermediate role of resource reallocation

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Abstract

Regulation has been identified as an important determinant of the innovation activities of companies, industries, and entire economies. As such, this paper investigates the potential effects of regulation on the innovative performance of firms in China. We identify an inverted U-shaped relationship between regulation and product innovation performance. That is, in China, regulation plays a positive role in promoting innovation: the more actively firms deal with regulations within certain threshold levels, the better their product innovation performance is. However, after reaching the threshold, the relationship reverses. Further, actively coping with regulations facilitates firms’ access to financial resources, which in turn promotes product innovation. Meanwhile, output distortion significantly impedes product innovation performance. However, regulation does not show a measurable impact on output distortion.

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Notes

  1. The survey question asked “In a typical week, over the last year, what percentage of the total senior management’s time was spent on dealing with requirements imposed by government regulations?” Some examples of government regulations are taxes, customs, labor regulations, licensing and registration, including dealings with officials and completing forms.

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Acknowledgments

The authors are grateful for discussion with the attendants in the International Conference on “Innovation, Institutions, and Governance” 2017 in Tallinn and the 17th International Schumpeter Society Conference on “Innovation, Catch-up, and Sustainable Development” 2018 in Seoul. The usual disclaimer applies.

Funding

This study was funded by the National Natural Science Foundation of China (grant number 71503247 and 71804140), the Beijing Social Science Foundation (grant number 15JDJGA040), and Institutes of Science and Development, Chinese Academy of Sciences (grant number Y9X3581H).

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Correspondence to Fang Wang.

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Wang, F., Dai, X. Regulation and product innovation: the intermediate role of resource reallocation. J Evol Econ 30, 1035–1061 (2020). https://doi.org/10.1007/s00191-020-00676-6

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