Agency incentives and firm innovation: Patenting behavior of state-owned firms in China

This study examines how firm agency shapes firm innovation behaviors. We argue that agents of the firm will give greater priority to the tasks of developing the innovations that are evaluated higher based on the metrics used by the principal to assess their performance, rather than based on the inherent value of the innovations. We examine this theoretical prediction in the context of how Chinese state-owned enterprises (SOEs) responded to pro-innovation public policies. We find that after the policy issuance, the Chinese SOEs wherein agency is more severe are more likely to produce patents in general, but are less likely to produce the particular type of patents that are deemed novel, than before the policy and than the Chinese SOEs with less severe agency. The severity of agency varies by the extent to which agents’ private (financial) incentives are aligned with the firm value, and by locations where the agents of SOEs are monitored more effectively. The findings lend support to the agency hypotheses, ...