The effects of corporate governance and ownership on the innovation performance of Chinese SMEs

Abstract

We investigate the degree to which corporate governance and ownership affect the innovation performance of firms in China with a particular focus on privately owned small and medium enterprises (SMEs). Using the appropriate theoretical frameworks, we derive hypotheses regarding the impact of ownership concentration, board size and composition, and the background of the CEO on innovative activity. These hypotheses are tested using a unique sample of 370 mostly private and relatively small Chinese firms in Zhejiang province, for the period 2004 to 2006. Using two measures of innovation, invention patents and new product sales, and a variety of estimation methods appropriate to each measure, we find limited evidence that corporate governance affects innovation performance, but the results do depend on the measure of innovation. In general, the results suggest that for this sample, corporate governance and ownership affect innovation activity more strongly when innovation is measured by patenting activity, rather than new product sales. We conclude with a discussion as to why this might be.

The effect of institutional ownership on firm innovation: Evidence from Chinese listed firms

“…By examining Chinese listed firms for 2001-2004, Choi et al (2011 find that foreign ownership and business affiliation are positively related to firm patenting. In a similar vein, Shapiro et al (2015) investigate small and medium enterprises (SMEs) in China and find that corporate governance and ownership are significantly associated with firm patenting. So far, the causality is not well established.…”

Roles of Relationships Between Large Shareholders and Managers in Radical Innovation: A Stewardship Theory Perspective

“…Table contains the mean, standard deviation, and correlations for each variable. The mean value of ownership concentration was 49.51%, which is typically regarded as highly concentrated (Shapiro et al, ). Trust was not significantly related to radical innovation, but the square of trust had a significantly negative correlation with radical innovation.…”

“…Previous research has found that ownership concentration influences firm innovation outcomes (Shapiro et al, ). Thus, we asked the respondents about the proportion of shares held by their firm's largest shareholder and eight firms were excluded from our analysis because their largest shareholder held less than 10% of their shares (Claessens et al, ).…”

“…There are two main reasons for this. First, as corporate governance varies across institutional environments (Estrin and Prevezer, 2011;Lee and O'Neill, 2003), scholars have called for more research on this topic in emerging markets (Shapiro et al, 2013). In emerging economies such as China, the lack of well-developed legal systems and financial markets leads to inefficient external corporate governance and weak investor protection (van Essen, van Oosterhout, and Carney, 2012).…”

“…Thus, considering the long-term benefit of radical innovation for shareholders, an agency problem arises in terms of how to induce managers' behavior to encourage radical innovation. A large body of corporate governance research argues that ownership concentration can help to deal with this agency problem within firm innovation activities (Choi, Lee, and Williams, 2011;Lee and O'Neill, 2003;Shapiro, Tang, Wang, and Zhang, 2013;Shleifer and Vishny, 1997). The main explanation is that a certain level of ownership concentration with the largest shareholders possessing at least 10% share of the firms reflects the existence of large shareholders (Claessens, Djankov, Fan, and Lang, 2002;Shapiro et al, 2013), who can influence managers' decisions on the deployment and integration of available resources in innovation activities (Belloc, 2012).…”