Asian Business & Management

, Volume 16, Issue 3, pp 130–157 | Cite as

Monetary incentives and innovation in Chinese SMEs

  • Daniel Shapiro
  • Yao Tang
  • Miaojun Wang
  • Weiying Zhang
Research Article


We investigate the impact of monetary incentives on the innovation performance of a unique sample of private Chinese SMEs. Building on an agency-theoretic framework, we find evidence that firm-specific incentives matter, but their impact is contingent on the nature of the incentive, the employees at whom it is directed, and the measure of innovation employed. However, contrary to our hypothesis and the evidence in other countries, we find that pay-for-performance measures for managers positively impact patenting activity. This result is inconsistent with agency theory and reflects the Chinese institutional environment, notably state incentives for innovation.


China SMEs Incentives Innovation Patents New-product sales 



We are indebted for valuable comments to two anonymous referees, Lutao Ning, Shaowei He, and participants at the conferences on ‘Local Context and Challenges of Innovation in China’, Queen Mary College, University of London, 11–12 April 2016, and the International Workshop on Entrepreneurship in China, Peking University, Beijing on 14–15 October 2016. Miaojun Wang is grateful for financial support from the National Natural Science Foundation of China (Grant 71672177), from the Natural Science Foundation of Zhejiang (Grant LY16G030007), and from the Hengyi Fund, Zhejiang University.


  1. Abrami, R.M., Kirby, W.C., and F.W. McFarlan. 2014. Why China can’t innovate. Harvard Business Review, March.Google Scholar
  2. Baker, G.P. 1992. Incentive contracts and performance measurement. Journal of Political Economy 100 (3): 598–614.CrossRefGoogle Scholar
  3. Banker, R.D., S. Lee, and G. Potter. 1996. A field study of the impact of a performance-based incentive plan. Journal of Accounting and Economics 21 (2): 195–226.CrossRefGoogle Scholar
  4. Bloom, M., and G.T. Milkovich. 1998. Relationships among risk, incentive pay and organizational performance. Academy of Management Journal 41 (3): 283–297.CrossRefGoogle Scholar
  5. Bonner, S.E., and G.B. Sprinkle. 2002. The effects of monetary incentives on effort and task performance: Theories, evidence and a framework for research. Accounting, Organizations and Society 27: 303–345.CrossRefGoogle Scholar
  6. Breznitz, D., and M. Murphree. 2011. Run of the Red Queen: Government, innovation, globalization and economic growth in China. New Haven: Yale University Press.Google Scholar
  7. Chang, X., K.K. Fu, A. Low, and W. Zhang. 2015. Non-executive employee stock options and corporate innovation. Journal of Financial Economics 115: 168–188.CrossRefGoogle Scholar
  8. Chen, V.Z., J. Li, and D.M. Shapiro. 2015. Subnational institutions and outward FDI by Chinese firms: The mediating role of firm-specific advantages. Multinational Business Review 23 (4): 254–276.CrossRefGoogle Scholar
  9. Chen, V.Z., J. Li, D.M. Shapiro, and X. Zhang. 2014b. Ownership structure and innovation: An emerging-market perspective. Asia Pacific Journal of Management 31 (1): 1–24.CrossRefGoogle Scholar
  10. Chen, V.Z., L. Li, and D.M. Shapiro. 2011. Are OECD-prescribed ‘Good corporate governance practices’ really good in an emerging economy? Asia Pacific Journal of Management 28 (1): 115–138.CrossRefGoogle Scholar
  11. Chen, Y.R., C.R. Chen, and C.K. Chu. 2014a. The effect of executive stock options on corporate innovative activities. Financial Management 43 (2): 271–290.CrossRefGoogle Scholar
  12. Chien, M.S., J.S. Lawler, and J.F. Uen. 2010. Performance-based pay, procedural justice and job performance for R&D professionals: Evidence from the Taiwanese high-tech sector. International Journal of Human Resource Management 21 (12): 2234–2248.CrossRefGoogle Scholar
  13. Choi, S.B., B.I. Park, and P. Hong. 2012. Does ownership structure matter for firm technological innovation performance? The case of Korean firms. Corporate Governance: An International Review 20 (3): 267–288.CrossRefGoogle Scholar
  14. Choi, S.B., S.H. Lee, and C. Williams. 2011. Ownership and firm innovation in a transition economy: Evidence from China. Research Policy 40 (3): 441–452.CrossRefGoogle Scholar
  15. Chow, I.H., and S.S. Liu. 2007. Business strategy, organizational culture and performance outcomes in China’s technology industry. Human Resource Planning 30 (2): 47–55.Google Scholar
  16. Coles, J.L., N.D. Daniel, and L. Naveen. 2006. Managerial incentives and risk-taking. Journal of Financial Economics 79 (2): 431–468.CrossRefGoogle Scholar
  17. Collis, D. 2016. Lean strategy. Harvard Business Review, March.Google Scholar
  18. Core, J.E., and W.R. Guay. 2001. Stock option plans for non-executive employees. Journal of Financial Economics 61 (2): 253–287.CrossRefGoogle Scholar
  19. Coughlan, A.T., and C. Narasimhan. 1992. An empirical analysis of sales-force compensation plans. Journal of Business 65 (1): 93–121.CrossRefGoogle Scholar
  20. Dechow, P.M., and R.G. Sloan. 1991. Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics 14 (1): 51–89.CrossRefGoogle Scholar
  21. Deng, Z., P.S. Hofman, and A. Newman. 2013. Ownership concentration and product innovation in Chinese private SMEs. Asia Pacific Journal of Management 30 (3): 717–734.CrossRefGoogle Scholar
  22. Driver, C., and M.J.C. Guedes. 2012. Research and development, cash flow, agency and governance: UK large companies. Research Policy 41 (9): 1565–1577.CrossRefGoogle Scholar
  23. Economist. 2011. Let a million flowers bloom. 10 March, pp. 79–81.Google Scholar
  24. Fan, P. 2014. Innovation in China. Journal of Economic Surveys 28: 725–745.CrossRefGoogle Scholar
  25. Firth, M., P.M.Y. Fung, and O.M. Rui. 2006. Corporate performance and CEO compensation in China. Journal of Corporate Finance 12 (4): 693–714.CrossRefGoogle Scholar
  26. Frye, M.B. 2004. Equity-based compensation for employees: Firm performance and determinants. Journal of Financial Research 27 (1): 31–54.CrossRefGoogle Scholar
  27. Gerhart, B., and G.T. Milkovich. 1990. Organizational differences in managerial compensation and financial performance. Academy of Management Journal 33 (4): 663–691.CrossRefGoogle Scholar
  28. Geroski, P.A., J. Van Reenen, and C.F. Walters. 1997. How persistently do firms innovate? Research Policy 26 (1): 33–48.CrossRefGoogle Scholar
  29. Gomez-Mejia, L.R., P. Berrone, and M. Franco-Santos. 2010. Compensation and Organizational Performance: Theory, Research and Practice. New York: M.E. Sharpe.Google Scholar
  30. Gu, C. and N. Jiang. 2011. No ‘wave of close-down’ among non-state-owned enterprises in Zhejiang. People’s Daily, 4 July: p. 9.Google Scholar
  31. Hahn, J., and W. Newey. 2004. Jackknife and analytical bias reduction for nonlinear panel models. Econometrica 72 (4): 1295–1319.CrossRefGoogle Scholar
  32. Hochberg, Y.V., and L. Lindsey. 2010. Incentives, targeting and firm performance: An analysis of non-executive stock options. Review of Financial Studies 23: 4148–4186.CrossRefGoogle Scholar
  33. Holmstrom, B. 1979. Moral hazard and observability. Bell Journal of Economics 10 (1): 74–91.CrossRefGoogle Scholar
  34. Holmstrom, B. 1989. Agency costs and innovation. Journal of Economic Behavior & Organization 12 (3): 305–327.CrossRefGoogle Scholar
  35. Holmstrom, B., and P. Milgrom. 1991. Multitask principal-agent analyses: Incentive contracts, asset ownership and job design. Journal of Law Economics and Organization 7: 24–52.CrossRefGoogle Scholar
  36. Holthausen, R.W., D.F. Larcker, and R.G. Sloan. 1995. Business unit innovation and the structure of executive compensation. Journal of Accounting and Economics 19 (2–3): 279–313.CrossRefGoogle Scholar
  37. Hong, S., L. Oxley, and P. McCann. 2012. A survey of the innovation surveys. Journal of Economic Surveys 26 (3): 420–444.CrossRefGoogle Scholar
  38. Honoré, F., F. Munari, and B.P. de La Potterie. 2015. Corporate governance practices and companies’ R&D intensity: Evidence from European countries. Research Policy 44 (2): 533–543.CrossRefGoogle Scholar
  39. Hoskisson, R.E., M.A. Hitt, and C.W.L. Hill. 1993. Managerial incentives and investment in R&D in large multiproduct firms. Organization Science 4 (2): 325–341.CrossRefGoogle Scholar
  40. Hu, A.G., and G.H. Jefferson. 2009. A great wall of patents: What is behind China’s recent patent explosion? Journal of Development Economics 90 (1): 57–68.CrossRefGoogle Scholar
  41. Inderst, R. 2009. Innovation management in organizations. European Economic Review 53 (8): 871–887.CrossRefGoogle Scholar
  42. Jefferson, G., A.G. Hu, X. Guan, and X. Yu. 2003. Ownership, performance and innovation in China’s large- and medium-size industrial enterprise sector. China Economic Review 14 (1): 89.CrossRefGoogle Scholar
  43. Jefferson, G.H., H. Bai, X. Guan, and X. Yu. 2006. R&D performance in Chinese industry. Economics of Innovation & New Technology 15 (4/5): 345–366.CrossRefGoogle Scholar
  44. Jensen, M.C., and K.J. Murphy. 1990. Performance pay and top-management incentives. Journal of Political Economy 98 (2): 225–264.CrossRefGoogle Scholar
  45. Jensen, M.C., and W.H. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 (4): 305–360.CrossRefGoogle Scholar
  46. Kanama, D., and K. Nishikawa. 2015. Does an extrinsic reward for R&D employees enhance innovation outcomes? Evidence from a Japanese innovation survey. R&D Management. doi: 10.1111/radm.12165.Google Scholar
  47. Kanter, R. 1985. Supporting innovation and venture development in established companies. Journal of Business Venturing 1 (1): 47–60.CrossRefGoogle Scholar
  48. Kren, L., and J.L. Kerr. 1993. The effect of behaviour monitoring and uncertainty on the use of performance-contingent compensation. Accounting and Business Research 23 (90): 159–167.CrossRefGoogle Scholar
  49. Le Breton-Miller, I., and D. Miller. 2006. Why do some family businesses out-compete? Governance, long-term orientations and sustainable capability. Entrepreneurship Theory and Practice 30 (6): 731–746.CrossRefGoogle Scholar
  50. Lee, D.Y., and P.L. Dawes. 2005. Guanxi, trust and long-term orientation in Chinese business markets. Journal of International Marketing 13 (2): 28–56.CrossRefGoogle Scholar
  51. Lerner, J., and J. Wulf. 2007. Innovation and incentives: Evidence from corporate R&D. Review of Economics and Statistics 89 (4): 634–644.CrossRefGoogle Scholar
  52. Lhuillery, S. 2011. The impact of corporate governance practices on R&D efforts: A look at shareholders’ rights, cross-listing and control pyramid. Industrial and Corporate Change 20 (5): 1475–1513.CrossRefGoogle Scholar
  53. Li, J., D. Chen, and D.M. Shapiro. 2010a. Product innovations in emerging economies: The role of foreign knowledge access channels and internal efforts in Chinese firms. Management & Organization Review 6 (2): 243–266.CrossRefGoogle Scholar
  54. Li, Y., C. Zhang, Y. Liu, and M. Li. 2010b. Organizational learning, internal control mechanisms and indigenous innovation: The evidence from China. IEEE Transactions on Engineering Management 57 (1): 63–77.CrossRefGoogle Scholar
  55. Lin, C., P. Lin, F.M. Song, and C. Li. 2011. Managerial incentives, CEO characteristics and corporate innovation in China’s private sector. Journal of Comparative Economics 39 (2): 176–190.CrossRefGoogle Scholar
  56. Luo, Y., Y. Huang, and S.L. Wang. 2012. Guanxi and organizational performance: A meta-analysis. Management and Organization Review 8 (1): 139–172.CrossRefGoogle Scholar
  57. Merchant, K.A., W.A. Van der Stede, T.W. Lin, and Z. Yu. 2011. Performance measurement and incentive compensation: An empirical analysis and comparison of Chinese and Western firms’ practices. European Accounting Review 20 (4): 639–667.CrossRefGoogle Scholar
  58. Miles, L., and S.H. Goo. 2013. Corporate governance in Asian countries: Has Confucianism anything to offer? Business and Society Review 118 (1): 23–45.CrossRefGoogle Scholar
  59. Murphy, K.J. 1999. Executive compensation. In Handbook of Labor Economics, Part 2, vol. 3, ed. O.C. Ashenfelter, and D. Card, 2485–2563. Amsterdam: Elsevier.CrossRefGoogle Scholar
  60. Peng, M.W., and S. Sauerwald. 2013. Principal-Principal conflicts. In The Oxford Handbook of Corporate Governance, ed. M. Wright, D.S. Siegel, K. Keasey, and I. Filatotchev, 658–672. New York: Oxford University Press.Google Scholar
  61. Roth, K., and S. O’Donnell. 1996. Foreign subsidiary compensation strategy: An agency theory perspective. Academy of Management Journal 39 (3): 678–703.CrossRefGoogle Scholar
  62. Science and Technology Department of Zhejiang Province. 2004. Information Bulletin. 14 November. Accessed 3 May 2016.
  63. Shapiro, D.M., T. Tang, M. Wang, and W. Zhang. 2015. The effects of corporate governance and ownership on the innovation performance of Chinese SMEs. Journal of Chinese Economic and Business Studies 13 (4): 311–335.CrossRefGoogle Scholar
  64. Stroh, L.K., J.M. Brett, J.P. Baumann, and A.H. Reilly. 1996. Agency theory and variable pay compensation strategies. Academy of Management Journal 39 (3): 751–767.CrossRefGoogle Scholar
  65. Sun, Y., and D. Du. 2010. Determinants of industrial innovation in China: Evidence from its recent economic census. Technovation 30 (9–10): 540–550.CrossRefGoogle Scholar
  66. Wang, C., and M.I. Kafouros. 2009. What factors determine innovation performance in emerging economies? Evidence from China. International Business Review 18 (6): 606–616.CrossRefGoogle Scholar
  67. Wooldridge, J.M. 2001. Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.Google Scholar
  68. Xinhua. 2015a. China issues opinions to encourage mass entrepreneurship, innovation. 11 March. Accessed 3 May 2016.
  69. Xinhua. 2015b. Li stresses innovation in 13th Five-year Plan. 9 December. Accessed 3 May 2016.
  70. Yip, G., and B. McKern. 2014. Innovation in emerging markets: The case of China. International Journal of Emerging Markets 9 (1): 2–10.CrossRefGoogle Scholar
  71. Zahra, S.A., D.O. Neubaum, and M. Huse. 2000. Entrepreneurship in medium-size companies: Exploring the effects of ownership and governance systems. Journal of Management 26 (5): 947–976.CrossRefGoogle Scholar
  72. Zanello, G., X. Fu, P. Mohnen, and M. Ventresca. 2016. The creation and diffusion of innovation in developing countries: A systematic literature review. Journal of Economic Surveys 30 (5): 884–912.CrossRefGoogle Scholar
  73. Zhang, Y., and S. Li. 2009. High-performance work practices and firm performance: Evidence from the pharmaceutical industry in China. International Journal of Human Resource Management 20 (11): 2331–2348.CrossRefGoogle Scholar
  74. Zhao, Y., P. Wong, A.M. Subramanian, and C. Hang. 2014. Technology licensing and innovation performance: Evidence from Chinese latecomers in high-tech industries. Journal of Chinese Economic and Business Studies 12 (2): 125–147.CrossRefGoogle Scholar
  75. Zhou, J., O. Tam, and W. Lan. 2016. Solving agency problems in Chinese family firms: A law and finance perspective. Asian Business & Management 15: 57–82.CrossRefGoogle Scholar
  76. Zhu, Y., X. Wittmann, and M.W. Peng. 2012. Institution-based barriers to innovation in SMEs in China. Asia Pacific Journal of Management 29 (4): 1131–1142.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd 2017

Authors and Affiliations

  • Daniel Shapiro
    • 1
  • Yao Tang
    • 2
  • Miaojun Wang
    • 3
  • Weiying Zhang
    • 4
  1. 1.VancouverCanada
  2. 2.BrunswickUSA
  3. 3.HangzhouChina
  4. 4.BeijingChina

Personalised recommendations