Rethinking the government as innovator: Evidence from Asian firms

Can government ownership of a firm spur innovation? While a robust body of empirical and theoretical work suggests that government ownership suppresses innovation, the increasing global competitiveness of government‐owned firms coupled with the transition of these firms’ competitive advantage from low‐cost labor‐focused to innovation‐focused suggests we reconsider the relationship between government ownership and innovation. This paper develops and tests a theory that a minority level of government ownership has a positive influence on firm‐level innovation, by substituting for a better‐developed financial market and alleviating financial constraints. By combining the incentives and monitoring benefits of private ownership with the more ‘patient’ shareholders of and protection from failure by the state, minority government ownership can provide an environment for firms to pursue otherwise risky innovative projects. The testing of this theory makes use of a large sample of Asian firms, and the results with respect to matched minority government‐owned and privately held firms show that minority government ownership increases the likelihood of innovation among financially constrained firms; moreover, it especially increases the likelihood of process innovation (as opposed to product innovation), which is traditionally difficult to finance. The study’s results–which stand to benefit firms and governments worldwide–remain robust to alternative mechanisms and controls, as well as to a variety of sensitivity tests.