Emerging Markets Review: Feng Zhan, Juliane Proelss, Denis Schweizer T

Emerging Markets Review 42 (2020) 100675
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Emerging Markets Review

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China: From imitator to innovator?☆

T
Feng Zhana,b, Juliane Proelssc, Denis Schweizerc,
⁎
a
DAN Department of Management and Organizational Studies, University of Western Ontario, London, Ontario, Canada
b
Boler College of Business, John Carroll University, University Heights, OH 44118, United States of America
c
Concordia University, John Molson School of Business Building, 1450 Guy, Montreal, Quebec H3H 0A1, Canada
ARTICLE INFO ABSTRACT
Keywords: We examine the effects of a specific Chinese governmental policy change, and assess how it has
China impacted firm innovation. To address potential endogeneity concerns, we use the policy change
Innovation as a quasi-natural experiment, and explain the exogenously caused variations. We also use a
Patents “difference-in-differences” approach to compare innovative activities of Chinese firms with those
R&d
of matched U.S. peers, and find that the policy change had a positive effect on Chinese firms'
Research intensity
research spending, as measured by research intensity. We show that Chinese firms increased their
research spending in response to the strategic shift by the government after 2008, relatively
outpacing their U.S. peers during the same time period. Chinese companies have not overtaken
their U.S. peers yet, but they have reduced the gaps between them.
Within five or ten years, we have the opportunity to become the number one smartphone
company in the world. (Lei Jun, CEO, Xiaomi, November 20, 2014).
1. Introduction
China's developing economy is one of the most significant and dynamic in the world. For more than three decades, it has also been
one of the fastest-growing, and, according to the International Monetary Fund (IMF), it is now officially the world's largest economy,
having supplanted the U.S. at the end of 2014. However, such steep growth leads to questions about than what is driving all this
development. In other words, does China's economic success stem from “Made in China,” or has it migrated to “Invented in China”?
Recently, China has shown serious ambitions to transform from the world's factory to a top global innovator. Techworld (2018)
reports on a speech the Chinese president, Xi Jinping, delivered at the national congress of the China Association for Science and
Technology, where he emphasized that “Great scientific and technological capacity is a must for China to be strong and for people's lives to
improve. China must be on the course to being a leading innovator worldwide by 2030.” Similarly, the premier of China, Li Keqiang,
mentioned “innovation” 38 times in his work report of 2018 (see The Globe and Mail, 2018).
China has not only overtaken the U.S. in terms of economic size, but, as of 2011, also in terms of annual patent applications.
During the 2007–2013 period, China's patent applications increased from 200,000 to more than 600,000. For the U.S., its closest
competitor, the number was approximately half that at the end of 2013 (sources: Derwent World Patents Index and Thomson
Innovation). This 16% annual growth rate is astonishing given that patent law did not even exist in China until 1985.
However, despite China's remarkable past achievements, and the ambition of company CEOs such as Xiaomi's Lei Jun, it is yet
☆
This paper was presented at the 2018 Cross Country Perspectives of Finance conferences held in Guangzhou, China and Dar es Salaam, Tanzania.
⁎
Corresponding author.
E-mail addresses: Juliane.Proelss@concordia.ca (J. Proelss), Denis.Schweizer@concordia.ca (D. Schweizer).
https://doi.org/10.1016/j.ememar.2019.100675
Received 31 October 2019; Accepted 31 December 2019
Available online 08 January 2020
1566-0141/ © 2019 Published by Elsevier B.V.
F. Zhan, et al. Emerging Markets Review 42 (2020) 100675
unclear whether 1) a governmentally prescribed jump in innovation under the 12th Five-Year Plan will ultimately change top
management behavior and lead to significantly higher allocations to research and development (R&D), 2) an intervention between
top executives' incentives (measured by performance-based compensation) and governmental prescription is needed, and 3) China
can rise above its image as the “world's workbench,” and transform into a global innovator that can compete with the U.S.
To address these three research questions, we study the change in research intensity (defined as research spending divided by
total assets) as the “input” of companies' innovative activities—R&D spending—instead of patents as the “output” of companies'
innovative activities (see Hambrick and MacMillan, 1985). This procedure has several advantages.
For example, we can recognize a change in R&D strategy relatively quickly because it “puts cash on the table.” Patents generally
come to fruition over time, and it can be difficult to determine which are a consequence of governmental or managerial incentives,
and which would have been realized organically. Moreover, research intensity can be easily compared between companies, while
patent quality is more difficult to measure precisely. Finally, our procedure controls for firm characteristics (e.g., size), in contrast to
the raw measure of R&D spending. Obviously, such spending will not necessarily translate into innovation in the future, but it is
clearly a prerequisite for a sustainable strategy in research-intensive industries where innovation is key, and it can also be measured
directly. The data we use on R&D spending by publicly listed companies is newly available, and comes from the China Stock Market
Financial Statements Database.
We focus on China because it provides a unique and richly detailed research setting. The initiatives implemented by the State
Council in 2008 can serve as a “quasi-natural” experiment that allows us to go beyond simply identifying a correlation of government
innovation stimulation on the real economy, to identifying, e.g., industrywide changes in research spending. This would otherwise be
difficult due to their endogenous nature. We analyze the main determinants, such as corporate governance and top management
compensation, on publicly listed firms' research intensity, and explore whether the change in China's research strategy translated into
an industrywide shift in research spending. We expect to find higher research intensity after the 2008 implementation after con-
trolling for several other potentially influencing factors. Furthermore, we expect that top management incentives (performance-based
compensation) to increase firm risk (higher research spending) will be most effective when they are implemented along with a
government stimulus. We also perform a series of robustness checks, where we control for companies' involvement in fraud, CEO
turnover, different measures of research intensity, different sets of control variables, and apply Heckman's (1979) approach.
To address the third research question, which explores whether China has become a serious competitor to the U.S., we compare
the research intensity of listed Chinese companies with their U.S. counterparts in a panel and a difference-in-differences (DiD) setting.
We aim to determine whether the Chinese research strategy established by China's State Council in 2008, along with subsequent
administrative and legal developments, such as the new Patent Law implemented in 2009, triggered a shift in the R&D activities of
Chinese companies. We are especially interested in comparing the research intensity of Chinese firms surrounding the government's
change in research strategy with that of their U.S. counterparts. If the government program was successful, we expect to find that
Chinese companies increased their research intensity more than their U.S. counterparts following the 2009 implementation.
The innovative thrust of this paper is manifold. Our setup provides various intriguing opportunities to contribute to the existing
literature on innovation. First, it allows us to identify how determinants such as corporate governance (e.g., board independence and size),
ownership concentration (percentage of blockholders), and top management incentives (e.g., fixed versus performance-based compen-
sation) impact the innovation of Chinese-listed companies. Second, by using enforcement actions, we can contribute to the limited
research on the relationship between fraud and innovation, and identify whether fraudulent companies have achieved a comparative
advantage over more legitimate companies. Third, we can explore the impact of top management turnovers on firm innovation, especially
the notion that CEOs have a tendency to follow a “quiet life” toward the end of their tenure, and to cut back on research expenses. Finally,
we can compare the research intensity of Chinese-listed companies with that of their U.S. peers in a panel and DiD approach, which allows
us to determine the success of the shift in Chinese research strategy established by China's State Council in 2008 relative to a comparison
group. We can thus gauge whether Chinese companies naturally caught up to their U.S. peers, or whether the successful actions of the
Chinese government expedited the process. This comparison will also allow us to rate the effectiveness of government-controlled in-
novation promotion programs, as well as a fuller determination of whether China has transformed itself into a global innovator. Findings
observed in this setting will allow policymakers to draw valuable conclusions about plans to promote innovation.
The remainder of this paper is structured as follows. Section 2 develops our hypotheses. In section 3, we describe the data
gathering process, while section 4 discusses the methodology. Our results and robustness checks are in section 5. Section 6 concludes.
2. Hypothesis gevelopment
2.1. Policy changes and R&D spending of Chinese firms
Methodologically, we follow existing research that sheds light on how policy changes can affect individual firms' innovation.
Existing literature shows that policy changes from the Chinese government can stimulate Chinese firms' commitment to innovation.
Xu and Yano (2017) use an exogenous event of Chinese premier Xi Jinping's anti-corruption campaign in 2013, and study its effect on
firm innovation. Their research indicates that Chinese firms invested significantly more funds in R&D and generated more patents
after the anti-corruption campaign. They identify this positive effect on firm innovation through two channels. First, the stronger
anti-corruption effort made it easier for firms to acquire long-term funding for innovation. Second, the anti-corruption effort served to
discourage large shareholders from expropriating minor shareholders' wealth.
Similarly, Fang et al. (2017) examine the impact of a specific policy change, the privatization of Chinese state-owned enterprises
(SOEs), on SOE innovation. Their empirical work shows that, in the first five years after privatization, SOEs' innovation outputs, as
2
measured by patent stocks, were 200% to 300% higher than during the five years prior to privatization. The authors also find that
private companies are more dedicated to innovation, and posit that China should emphasize the private sector in order to transform
from a labor-intensive “world factory” into a global innovator.
Researchers have also studied the impact of policy change on firms' innovation in the U.S. Mao and Zhang (2018) investigate how
the accounting regulation change FAS 123R in the U.S. influenced U.S. firms' risk-taking behavior, especially regarding innovation.
They argue that innovation requires the implementation of new and unconfirmed methods that are associated with high risk.
Therefore, it is necessary for top managers to take extra risks when committing to these strategies. However, the adoption of FAS
123R significantly decreased option grants to U.S. firms' top management. They were thus less likely to invest in risky and innovative
projects because managerial wealth became less sensitive to firm-specific risks. Using a sample of U.S. firms from 1992 to 2008, they
show that the adoption of FAS 123R led to a significant reduction in R&D investments.
In our first set of analyses, we evaluate the impact of a governmentally “prescribed” increase in innovativeness on companies'
research spending, as measured by Research Intensity. We use the example of China's 12th Five-Year Plan and the Chinese National
Patent Development Strategy. According to a research report conducted by the U.S.-China Economic and Security Review
Commission (see Casey and Koleski, 2011), China began implementing Five-Year Plans in 1953 in order to provide direction and
structure to the development of the Chinese economy. Five-Year plans can be viewed as key indicators of the economic and social
development motivations of the highest levels of Chinese leadership, which could not otherwise be anticipated. Therefore, the policy
initiatives by the State Council in 2008 to stimulate innovation could serve as an exogenous shock that enables us to identify “causal”
effects of a government innovation stipulation on Chinese firms' R&D commitments. If the policy change was undertaken in order to
develop China as a global innovator, we should observe that Chinese companies significantly increased their R&D investments after
2008, when the 12th Five-Year Plan became effective. Thus, we propose the following as Hypothesis 1:
Hypothesis 1. The research intensity of Chinese companies significantly increased after the 12th Five-Year Plan became effective in
2009.
2.2. The effect of top management compensation and ownership on R&D spending
The separation of ownership and control within a firm can benefit owners by steering them toward hiring managers who have the
expertise and in-depth knowledge that they lack. However, it also gives rise to the classic principal-agent problem and related agency
costs, where asymmetric information between the owner (principal) and manager (agent) may lead to a suboptimal outcome for the
owner. One way to align managers' behavior with shareholders' interests is to tie management compensation to company perfor-
mance, thus improving research innovation.
Lerner and Wulf (2007) investigate the link between corporate R&D managers' compensation and R&D investments for U.S. firms
during the 1990s. Their empirical work demonstrates a significant relationship between long-term-oriented (equity-based) compen-
sation and innovation performance. Specifically, a higher ratio of R&D managers' long-term incentives to total compensation is asso-
ciated with more promising innovation outcomes, with a higher number and greater originality of patents, more patent citations, and
more frequent patent awards. In contrast, short-term-oriented compensation (e.g., annual bonuses) has little impact on innovation.
Sanyal and Bulan (2010) similarly delve into the influence of top management compensation on firms' R&D spending and in-
novation outcomes. They create various measures for the top three executives' compensation: equity holdings, pay-performance
sensitivity, and short-term incentives. By studying a sample of U.S. firms from 1992 to 2005, they discover that higher R&D com-
mitment and innovation outcome are positively related only to top managers' equity-linked compensation, namely, the percent of top
management shares and pay-performance sensitivity. Based on the above literature, if innovation will eventually increase firm value
(see Hall, 1993; Blundell et al., 1999; Hall et al., 2005), we expect managers in Chinese companies to devote more effort to R&D
spending if their wealth is aligned with firm performance.
Furthermore, under a particular institutional environment with a highly concentrated political system, companies in China are
inclined to positively respond to the Chinese government's goals and initiatives in economic development (see Schweizer et al., 2019;
Schweizer et al., 2019b). Thus, we expect the effect of top management's incentive-based compensation to be stronger when the
Chinese government wants to encourage Chinese firms' R&D commitment. Therefore, the hypotheses pertaining to top managers'
incentives and innovation are as follows:
Hypothesis 2a. There is a positive relationship between research intensity and top management compensation.
Hypothesis 2b. The positive relationship between Chinese companies' R&D spending and top managements' incentive-based
compensation is stronger after the 12th Five-Year Plan became effective in 2009.
Another way to reduce agency costs is to ensure that a strong shareholder presence impacts top executive monitoring. Jensen and
Meckling (1976) and Shleifer and Vishny (1986) argue that a concentrated ownership structure is more favorable for solving agency
problems because individual (small) investors have weaker incentives and more difficulties monitoring management effectively.1 In
this context, Aghion et al. (2013) argue that higher (more concentrated) institutional ownership fosters innovation. They explain this
finding by means of a theoretical model where the presence of institutional investors (external monitors) alleviates CEOs' aversion to
1
In China, listed companies are typically dominated by a single shareholder (e.g., the central or local government).
3
risky R&D because of their fear of termination in the event of failure.

However, unsuccessful innovation strategies may also be a result of bad luck, rather than bad managers. More effective mon-
itoring of managerial actions can “insulate the manager against the reputational consequences of bad income realizations,” thus
creating greater incentives for CEOs to undertake risky innovation. And the “bright” side of concentrated ownership also has a “dark”
side. Large shareholders may “misuse” their voting power to, e.g., change board composition or approve profit transfer agreements,
ultimately putting their own goals ahead of stakeholder/
shareholder (long-term) interests (La Porta et al., 2000; Millar et al., 2005; Wang and Xiao, 2011). This behavior is known as
“tunneling.” As defined by Johnson et al. (2000), it refers to the transfer of assets and (monetary) resources from a company to its
large (controlling) shareholder(s).
The phenomenon of tunneling by controlling shareholders is well documented in Chinese-listed companies, presumably because
of an insufficient disclosure system, relatively weaker corporate governance, and less enforcement by authorities (see Ding et al.,
2007; Conyon and He, 2011). In these cases, the dominant shareholder(s) may be less interested in the uncertain future outcomes
from research-related investments (such as the benefit of rising company stock price performance), and instead favor tunneling. The
likelihood of tunneling thus increases with an increase in ownership concentration, which results in less research spending.
Therefore, how ownership concentration relates to Chinese companies' research spending is an empirical issue. We propose the
following opposing hypotheses:
Hypothesis 3a. If the monitoring effect dominates, there is a positive relationship between ownership concentration and research
intensity.
Hypothesis 3b. If the tunneling effect dominates, there is a negative relationship between ownership concentration and research
intensity.
2.3. Comparing changes in research intensity between Chinese and U.S. companies
The previous analyses concentrated only on the impact on Chinese companies. However, as anecdotal evidence and the existing
literature have documented, China has been investing a vast array of financial and human resources to spur innovation. China's goal
is to reduce its R&D gap with the U.S., and eventually become the global champion in innovation.
USA Today (2017) reports that, although the U.S. is currently the leader in R&D spending, with an aggregate $500 billion in 2015,
China has quietly exceeded the U.S. in investing in later-stage R&D, which realizes the commercial value of such research. USA Today
(2017) predicts that, by 2018, China will invest up to twice as much as the U.S in later-stage R&D. This trend is generally supported
by academic research.
Wei et al. (2017) examine the development of China's investment in R&D. They show that, in 1991, it accounted for only 0.7% of
China's GDP, far lower than technological leaders such as the U.S., Japan, and Germany. However, by 2014, the ratio of R&D
spending to GDP in China had increased dramatically to 2.05%. This percentage is comparable to the average of OECD countries, and
slightly lower than the average (2.7%) of the top three richest economies (the U.S., Japan, and Germany), despite the fact that China's
income level was less than one-fifth that of OECD countries. They also note that another proxy for innovation, the share of researchers
in the population, has experienced a dramatic increase in China, from 443 researchers per 1 million people in 1996, to 1113 per
million in 2014. Nevertheless, that number still lagged the U.S, Japan, and Germany, which had 3122, 4947, and 2211 researchers
per 1 million people, respectively.
Wei et al. (2017) also investigate a crucial indicator of innovation, the number of patents granted by the U.S. Patent and Tra-
demark Office (USPTO). They find that, in 1995, the USPTO granted only 62 patents to Chinese corporate applicants. That number
rose significantly to 7236 in 2014. And the annual growth rate of patents granted in China rose from 21% between 1995 and 2005 to
38% between 2006 and 2014. This trend is roughly consistent with the anticipated effect of the 12th Five-Year Plan.
Crescenzi and Rodríguez-Pose (2017) compare the fraction of R&D expenditures to GDP for China, India, and the EU. They show
that the convergence of this ratio between China and the EU had been accelerating since the start of the 21st century. In 1995, the
EU's R&D spending relative to GDP was almost three times that of China. Nevertheless, by 2013, that gap had virtually vanished.
Conversely, the gap in R&D investment to GDP remained stable between the EU and India.
From the aforementioned research, we expect to find that a potential increase in research intensity after the initiation of the 12th
Five-Year Plan does not stem from the global trend toward increased research spending, but from the Chinese government's perse-
verance to replace the U.S. as the new leader in innovation. Our fourth hypothesis is therefore specified as follows:
Hypothesis 4. The gap in research intensity between Chinese companies and U.S. firms dropped significantly when the 12th Five-
Year Plan became effective in 2009.
3. Data-gathering process and dataset
Our observation period covers January 1, 2007, through December 31, 2014, because data on research expenditures for Chinese-
listed companies, and therefore our main variable of interest, Research Intensity, are only available from 2007 onward. The data
became available for the first time in a commercial database in 2014/2015 (see Jiang et al., 2013). However, for some accounting-
related control variables, we also include data for the prior two years, 2005 and 2006.
4
Table 1
Summary statistics for Chinese firms.
Variable name # Mean Std 5% Quantile Median 95% Quantile
Research Intensity (RI) 10,448 0.100 0.378 0.000 0.000 0.690

RI (Alternative Measure 1) 10,401 0.187 0.740 0.000 0.000 1.186
RI (Alternative Measure 2) 10,447 0.215 0.834 0.000 0.000 1.435
Post 10,496 0.760 0.427 0.000 1.000 1.000
Log (Total Salary) 10,360 14.591 0.867 13.104 14.629 15.975
Log (Total # Shares Board) 5279 12.516 3.431 7.687 11.629 21.457
Log (Total # Chair) 3705 12.928 3.410 8.364 12.056 21.393
Log (Total Value Share Board) 5101 14.727 3.6540 9.784 13.867 24.556
Top 3 Executives' Pay 10,344 13.691 0.840 12.269 13.729 15.014
Log (Total Executive Share) 5205 11.865 3.212 7.556 11.155 17.829
Log (Total Mgmt Share) 6697 12.137 3.372 7.595 11.424 18.364
PerStateOwn 10,250 13.374 20.290 0.000 0.000 56.562
% Independent Directors 10,276 36.404 4.939 33.333 33.333 44.444
Board Size 10,395 9.862 2.364 7.000 9.000 15.000
Ownership Concentration 10,387 15.981 11.769 2.856 12.778 39.389
HHI Industry Index 10,496 12.798 12.898 2.774 8.171 38.305
Log (Cash) 10,391 19.481 1.559 16.759 19.588 21.860
Leverage 10,392 54.607 29.319 16.655 52.959 87.492
Tangibility 10,392 26.133 18.341 1.262 22.883 61.195
Profitability 10,392 4.100 8.310 −8.145 3.808 16.061
Log (Sales) 10,356 21.007 1.517 18.500 21.019 23.589
Sales Growth 10,172 25.914 87.341 −34.690 11.979 99.913
Log (Firm Age) 10,191 2.228 0.597 1.099 2.398 2.890
Market to Book Ratio 10,247 3.812 4.411 0.861 2.780 10.767
Firm Size 10,250 21.952 0.951 20.512 21.862 23.703
Fraud Firm 10,496 0.457 0.498 0.000 0.000 1.000
Fraud Announcement 10,496 0.068 0.251 0.000 0.000 1.000
After Fraud Announcement 10,496 0.280 0.449 0.000 0.000 1.000
CEO Turnover 10,496 0.287 0.453 0.000 0.000 1.000
CEO Turnover Firm 10,496 0.980 0.139 1.000 1.000 1.000
After CEO Turnover 10,496 0.945 0.227 0.000 1.000 1.000
This table reports the number of observations for firm years (#), mean, standard deviation (Std), 5% quantile, median, and 95% quantile for all
variables. Variables are in percentage values (if applicable) and winsorized at the 99% level. Variables are defined in Appendix A1.
Stock price data for all Chinese firms listed on the Shanghai and Shenzhen stock exchanges come from the China Stock Market
Trading Database (CSMAR). Accounting data for Chinese (U.S.) companies come from CSMAR's China Stock Market Financial
Statement Database (Standard & Poor's Compustat, North America, Fundamentals Annual Database). The US$/CNY exchange rate is
taken from the CSMAR.
Corporate governance-related data for Chinese companies come from CSMAR's China Listed Firms' Corporate Governance
Research Database. Basic fraud data comes from the China Securities Regulatory Commissions' Enforcement Action Research
Database (CSMAR). This database contains information on regulatory enforcements by CSRC and other regulatory authorities of
Chinese-listed companies (Shanghai and Shenzhen stock exchanges). CEO turnover information comes from changes in the Board
Chairman and General Manager (CSMAR) database, which includes information on turnover reasons, tenure, etc. CSMAR data has
been widely used by scholars such as Chen et al. (2010); Conyon and He (2011); Chen et al. (2011); Hass et al. (2016a); Müller et al.
(2016); and Hass et al. (2016b); Proelss et al. (2018).
Our combined dataset consists of 1312 publicly traded firms in China, with 10,496 firm-year observations on the Shanghai and
Shenzhen stock exchanges over the 2007–2014 period. We exclude all companies with missing balance sheet information for the
sample period, as well as companies with more than one year of missing research expenditures, in order to ensure consistent data
coverage. Following standard literature in this field, we also exclude all firms in financial industries such as banking, insurance, and
capital market services, manufacturing companies (such as leather-related products and paper-making products), oil and gas industry
companies, and those in the culture and education industries. These industries are more labor-intensive and/or have little or no R&D
expenses (see Table A17 in the appendix for all included industries).
Detailed variable definitions and the sources used here are also provided in the appendix (Table A1). Our dependent variable,
Research Intensity, is defined as the ratio of R&D expenses to the total book value of assets. Table 1 gives descriptive statistics for our
full sample. The summary statistics show sizable variations in research spending and firm characteristics. Average research intensity
is 0.10%, with a range from 0% to 2.54% (unreported).2 The average sample firm has been listed on the respective exchange for
9.3 years, has annual sales of CNY 1.3 billion, leverage of 54.61%, and tangible assets of 26.13%. Average ROA is 4.1%, and the
average market-to-book ratio is 3.81. Table 2 presents a correlation matrix.
2
Values are winsorized at the 1% level on both sides.
5
F. Zhan, et al.
Table 2
Correlation matrix for Chinese firms.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) Research Intensity (RI) 1.00

(2) RI (Alternative Measure 1) 0.93⁎ 1.00
(3) RI (Alternative Measure 2) 0.94⁎ 0.86⁎ 1.00
(4) Post 0.05⁎ 0.06⁎ 0.05⁎ 1.00
(5) Log (Total Salary) 0.11⁎ 0.09⁎ 0.11⁎ 0.29⁎ 1.00
(6) PerStateOwn −0.06⁎ −0.06⁎ −0.04⁎ −0.34⁎ −0.12⁎ 1.00
(7) PerStateOwn⁎Post −0.03⁎ −0.03⁎ −0.02⁎ 0.25⁎ 0.03⁎ 0.65⁎ 1.00
(8) % Independent Directors 0.04⁎ 0.04⁎ 0.04⁎ 0.08⁎ −0.01 −0.07⁎ −0.01 1.00
(9) Board Size 0.00 −0.02 0.02⁎ 0.09⁎ 0.23⁎ 0.07⁎ 0.11⁎ −0.21⁎ 1.00
(10) Ownership Concentration −0.04⁎ −0.05⁎ −0.04⁎ −0.03⁎ 0.05⁎ 0.36⁎ 0.28⁎ 0.02⁎ 0.02⁎ 1.00
(11) HHI Industry Index −0.03⁎ −0.02⁎ −0.03⁎ 0.06⁎ −0.01 0.00 0.04⁎ −0.01 0.04⁎ 0.02⁎ 1.00
(12) Log (Cash) 0.06⁎ 0.05⁎ 0.07⁎ 0.18⁎ 0.58⁎ 0.06⁎ 0.13⁎ −0.01 0.2⁎ 0.24⁎ −0.01 1.00
6
(13) Leverage −0.07⁎ −0.08⁎ −0.02⁎ −0.01 −0.12⁎ 0.00 0.01 0.03⁎ 0.03⁎ −0.03⁎ 0.03⁎ −0.19⁎ 1.00
(14) Tangibility −0.08⁎ −0.08⁎ −0.08⁎ −0.09⁎ −0.13⁎ 0.14⁎ 0.07⁎ −0.05⁎ 0.09⁎ 0.03⁎ 0.01 −0.15⁎ 0.04⁎
(15) Profitability 0.04⁎ 0.04⁎ 0.01 −0.02⁎ 0.25⁎ 0.00 −0.01 −0.02⁎ −0.02⁎ 0.1⁎ −0.01 0.26⁎ −0.37⁎
(16) Log (Sales) 0.03⁎ −0.01 0.06⁎ 0.14⁎ 0.55⁎ 0.09⁎ 0.13⁎ −0.03⁎ 0.2⁎ 0.27⁎ −0.02⁎ 0.77⁎ 0.00
(17) Sales Growth −0.01 −0.01 −0.01 −0.03⁎ −0.01 0.06⁎ 0.06⁎ 0.02⁎ 0.01 0.1⁎ 0.01 0.04⁎ 0.02⁎
(18) Log (Firm Age) −0.02⁎ −0.02⁎ 0.01 0.23⁎ 0.1⁎ −0.11⁎ 0.01 0.04⁎ 0.02⁎ −0.11⁎ 0.02⁎ 0.07⁎ 0.15⁎
(19) Market to Book Ratio 0.05⁎ 0.06⁎ 0.06⁎ −0.08⁎ −0.11⁎ −0.01 −0.05⁎ 0.01 −0.04⁎ −0.03⁎ 0.02⁎ −0.18⁎ −0.11⁎
(20) Firm Size 0.08⁎ 0.09⁎ 0.09⁎ 0.12⁎ 0.51⁎ 0.05⁎ 0.09⁎ 0.03⁎ 0.16⁎ 0.27⁎ 0.02⁎ 0.66⁎ −0.12⁎
(21) Fraud Firm 0.00 0.01 0.01 0.00 −0.13⁎ −0.06⁎ −0.03⁎ −0.01 −0.03⁎ −0.12⁎ 0.06⁎ −0.18⁎ 0.09⁎
(22) Fraud Announcement 0.00 0.00 0.00 0.07⁎ −0.02⁎ −0.08⁎ −0.03⁎ 0.00 0.00 −0.06⁎ 0.03⁎ −0.06⁎ 0.04⁎
(23) After Fraud Announcement 0.02⁎ 0.04⁎ 0.03⁎ 0.14⁎ −0.06⁎ −0.13⁎ −0.04⁎ 0.02⁎ −0.01 −0.14⁎ 0.1⁎ −0.14⁎ 0.13⁎
(24) CEO Turnover −0.02 −0.02⁎ −0.01 −0.03⁎ −0.09⁎ 0.04⁎ 0.03⁎ 0.03⁎ 0.13⁎ 0.01 0.01 −0.07⁎ 0.09⁎
(25) CEO Turnover Firm −0.03⁎ −0.03⁎ −0.01 −0.01 −0.03⁎ 0.07⁎ 0.05⁎ 0.00 0.02⁎ 0.02⁎ −0.02 −0.01 0.07⁎
(26) After CEO Turnover −0.01 −0.01 0.00 0.11⁎ 0.00 −0.06⁎ 0.01 0.03⁎ −0.02⁎ −0.05⁎ −0.02⁎ 0.01 0.06⁎
(continued on next page)

F. Zhan, et al.
Table 2 (continued)
(14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14) 1.00
(15) −0.14⁎ 1.00
7
(16) 0.06⁎ 0.17⁎ 1.00
(17) −0.06⁎ 0.17⁎ 0.05⁎ 1.00
(18) −0.13⁎ −0.08⁎ 0.09⁎ 0.01 1.00
(19) −0.08⁎ 0.11⁎ −0.21⁎ 0.08⁎ 0.00 1.00
(20) −0.07⁎ 0.34⁎ 0.62⁎ 0.09⁎ 0.12⁎ 0.12⁎ 1.00
(21) −0.06⁎ −0.06⁎ −0.18⁎ 0.04⁎ 0.03⁎ 0.1⁎ −0.13⁎ 1.00
(22) −0.01 −0.05⁎ −0.06⁎ 0.00 0.00 0.03⁎ −0.03⁎ 0.29⁎ 1.00
(23) −0.05⁎ −0.06⁎ −0.12⁎ 0.03⁎ 0.16⁎ 0.06⁎ −0.07⁎ 0.68⁎ 0.43⁎ 1.00
(24) 0.00 −0.09⁎ −0.07⁎ 0.07⁎ 0.07⁎ 0.03⁎ −0.05⁎ 0.03⁎ 0.02⁎ 0.05⁎ 1.00
(25) 0.00 −0.06⁎ 0.01 0.01 0.15⁎ 0.00 0.00 −0.03⁎ −0.02⁎ 0.01 0.09⁎ 1.00
(26) −0.05⁎ −0.06⁎ 0.02⁎ 0.01 0.32⁎ 0.00 0.03⁎ 0.00 0.00 0.08⁎ −0.02 −0.03⁎ 1.00
This table presents Pearson correlation coefficients for all variables except Log (Total # Shares Board), Log (Total # Shares Chair), Log (Total Value Shares Board), Log (Total Value Shares Chair), Top 3
Executives' Pay, Log (Total Executive Share), and Log (Total Mgmt Share), because information for those is only available for about half the firm-years (see Table 1). Winsorized variables are used in the
multivariate regressions for the full sample of Chinese firms. Variables are defined in Appendix A1.
⁎
Indicates correlations are statistically significant at least at a 10% level.
To identify potential U.S. matching companies, we consider all publicly listed companies available in Standard & Poor's
Compustat North America Fundamentals Annual Database. We exclude companies that are not listed in the U.S., and any that are
missing Research and Development Expense information for more than one year during the 2007–2014 sample period (equivalent to the
Chinese firms). We are left with 1912 U.S. companies (15,264 firm-years) as potential matching companies. For the matching
procedure, we consider all sample firms with non-missing matching variables in 2006, the year prior to that in which information on
research expenditures is available for Chinese-listed companies.
To identify Chinese-U.S. company matches, we apply six different approaches to assure robustness. Specifically, we match each
Chinese company with one U.S. company based on firm characteristics in 2006. We keep the matched Chinese-U.S. company pair for
all subsequent years to compare the development of Research Intensity. The matching procedure is conducted with replacement, and
we apply the following procedures: 1) a variation on Ritter (1991), 2) a variation on Spiess and Affleck-Graves (1995), 3) a variation
on Michaely et al. (1995), and 4) the same industry and market-to-book procedure (see Table A16 in the appendix for details about
the matching procedures).3
Furthermore, we 5) apply a nearest-neighbor propensity score matching procedure with matching variables Log(Sales), Leverage,
ROA, SalesGrowth, Firm Age, and Asset Tangibility. We require that the Chinese and U.S. matched pair be within the same industry in
order to estimate the propensity score. All variables are measured for 2006. Procedure (5) uses variables as reported in the database;
for the procedure (6), we apply a mean adjustment for all control variables to account for a systematic cross-country variation in
accounting variables.4 For all matching approaches, we convert CSMAR's industry description code to a two-digit SIC code, which
ensures that both matched companies are in the same industry (see Tables A16 and A17 in the appendix for more details).
4. Methodology
Next, we estimate the following baseline panel regressions. The independent variable is Research Intensity, defined as research
expenses divided by total assets.5 For a robustness check, we use two alternative measures to proxy for research intensity: Research
Intensity (Alternative Measure 1), calculated as research expenses divided by total sales, and Research Intensity (Alternative Measure 2),
which uses the book value of equity as the denominator instead. Note that we include prior year's (t − 1) Research Intensity (RIi, t−1)
from firm i as the first controlling variable, because research spending is typically rather sticky.
To measure the effectiveness of the 2008 change on Chinese research strategy, we include a Post dummy variable that equals 1
after 2008. We include a vector of control variables for Corporate Governance6 (CGi,t) variables (Total Salary,7 % Independent Directors,
Board Size), tunneling (Ownership Concentration), industry concentration (HHI Industry Index), change in Chinese research strategy
after 2008 for SOEs (PreStateOwn, PreStateOwn x Post), and a vector of other firm characteristic control variables Xi,t−1 (Cash,
Leverage, Tangibility, Profitability, Log(Sales), SalesGrowth, Log(Age), Mkt-to-Book Ratio, Firm Size) for each firm (i). We also include
industry (j) fixed effects φj,province (p) fixed effects γp for firm province location to economic differences in the provinces,8 and a firm
dummy variable ξi (see Fan et al., 2007) to absorb any time-invariant firm unobservable characteristics that may bias the results. Note
that we do not include year fixed effects, because it would preclude inclusion of our policy variable Post.
The basic structure of our regression Eq. (1), using either two-way clustered (firm and province or firm and industry) or one-way
clustered (firm) standard errors, depending on the regression specification, is as follows:
RIi, t = 1 + 1 RIi, t 1 + 2 Post + cg CGi, t 1 + b X i, t 1 + i + j + p + i, t . (1)
We expect the coefficients on Post, β2, to be statistically significantly positive, indicating an increase in research intensity after
2008.
To compare the Research Intensity of Chinese and U.S. companies, we next perform a panel regression, as follows:
RIi, t = 1 + 1 RIi, t 1 + 2 China × Post + 3 China + 4 Post + b Yi, t 1 + i + j + t + i, t , (2)
where China is a dummy variable that equals 1 for Chinese companies, and 0 for U.S. companies, and Post is a dummy variable that
equals 1 for firm-year observations after 2008. Yijp, t is a vector of control variables that may affect a firm's Research Intensity, and,
3
In unreported robustness checks, we also matched the industry classifications between U.S. and Chinese companies using Capital IQ. The results
remain qualitatively stable, and are available from the authors upon request.
4
We calculate mean adjusted matching variables as follows: NChina, U. S./Mean(NChina, U. S), where N is the vector of the respective matching
variables for Chinese and U.S. companies separately.
5
We also checked for robustness reason the transformation Research Intensity (log(1 + RI) (see Table A6).
6
See Jiang and Kim (2015) for an extensive review of Chinese corporate governance.
7
In Table 5, we carve out performance-based compensation and instead use Total Salary, as well as the variables Log (Total # Shares Board), Log
(Total # Shares Chair), Log (Total Value Shares Board), and Log (Total Value Shares Chair) separately.
8
To determine whether the Shenzhen technology cluster impacts our results, we include a “Shenzhen” dummy variable that equals 1 if a com-
pany's headquarters is in Shenzhen, and 0 otherwise, in our main regressions in Table 4. In unreported results, we find that the “Shenzhen” dummy
variable is statistically insignificant (based on conventional levels), and our results remain qualitatively unchanged. As an additional robustness
check, we also use a “province x technology” fixed effect to capture any potential influence of technology clusters on our results. We exclude this
fixed effect interaction from the regressions because of multicollinearity. Examining the data reveals, for example, that many companies in the
Guangdong province have headquarters located in Shenzhen. Therefore, we are convinced that the possible effects of technology clusters are
captured by our province fixed effects.
8
following Tan et al. (2015), includes all control variables (Leverage, Tangibility, Profitability, Sales Growth, Log(Age), and Log(Sales)).
We include industry fixed effects φj, firm fixed effects ξi, and year fixed effects ψt, and cluster at the firm level. If the Chinese
government program led to an increase in Research Intensity, we expect to find that Chinese companies at least caught up with their
matched U.S. pairs after the program implementation. Thus, we expect that β2 will be positive, which implies that Chinese companies
have closed the Research Intensity gap after the 2008 strategic shift by the Chinese government.
In a robustness check, similarly to Eq. (2), we follow a multivariate DiD approach and analyze the paired differences as follows:
RIi, t = 1 + 1 RIi, t 1 + 2 Post + b Yi, t 1 + i + j + t + i, t , (3)
where Δ refers to the difference between the observed variable for Chinese firm i in year t and its matched U.S. pair in year t. If the
Chinese government program led to an increase in Research Intensity, we again expect to find that the Chinese companies at least
caught up with their matched U.S. pairs after the program implementation. Thus, we expect to find a positive coefficient for β2.
5. Empirical results
5.1. Determinants of research intensity
In this section, we conduct an empirical test to explore the factors that influence our main variable of interest, Research Intensity.
Before providing multivariate evidence, we begin with a univariate test for differences in Research Intensity (as well as alternative
measures) to investigate whether it changed around the new policy implementation (Table 3). We then lay out the results for the
multivariate evidence (Table 4).
Table 3 compares the means and medians of three measures of research intensity: 1) research spending over total assets (panel A),
2) research spending over sales (panel B), and 3) research spending over the book value of equity (panel C).
For measure (1), the mean (standard deviation) of Research Intensity is 0.0637% (0.2876%) before the government policy, and
0.110% (0.4022%) afterward; for measure (2), it is 0.1078% (0.5092%) before, and 0.2114% (0.7969%) afterward; and, for measure
(3), it is 0.1374% (0.6483%) before, and 0.2399% (0.8828%) afterward. Overall, all three measures indicate that, after the change,
Chinese firms dramatically increased their research spending, resulting in an amount that nearly doubled. Difference tests in both the
mean and median are statistically significant at a 1% level for all three measures.
Table 4 illustrates the regression results among the dependent variable Research Intensity and various corporate governance
measures and firm-specific characteristics. All specifications include past research intensity from the previous year (Lag RI) and the
Table 3
Univariate comparison test for research intensity before and after policy implementation.
Before After
Panel A: Research Intensity Before and After Policy Implementation
Group 0 1
Mean 0.0637 0.1110
Standard Deviation 0.2876 0.4022
Median 0.0000 0.0000
Differences in Mean (0–1) −6.4674***
Differences in Median (0–1) p = 0.0000**
Number of Observations 2498 7950
Panel B: Research Intensity (Alternative Measure 1) Before and After Policy Implementation
Group 0 1
Mean 0.1078 0.2114
Median 0.0000 0.0000
Differences in Median (0–1) p = 0.0000***
Panel C: Research Intensity (Alternative Measure 2) Before and After Policy Implementation
Group 0 1
Mean 0.1374 0.2399
Median 0.0000 0.0000
Differences in Median (0–1) p = 0.0000**
This table compares the mean and median of Research Intensity (panel A), Research Intensity (Alternative Measure 1) (panel B), and Research
Intensity (Alternative Measure 2) (panel C), for before and after the 2008 government policy implementation. *, **, and *** denote statistical
significance at the 10%, 5%, and 1% levels, respectively.
9
Table 4
Multivariate analysis of research intensity.
(1) (2) (3) (4) (5) (6)
Constant −0.4875*** −0.3867*** −0.6138*** −0.3972*** −0.5372*** −0.5272***

[−5.86] [−4.82] [−4.41] [−4.36] [−5.27] [−6.14]
Lag RI 0.7345*** 0.7529*** 0.3666*** 0.3558*** 0.7467*** 0.7537***
[25.72] [26.35] [11.74] [13.63] [16.38] [26.65]
Post 0.0330*** 0.0384*** 0.0237*** 0.0240*** 0.0351*** 0.0321**
[4.42] [5.04] [3.38] [3.77] [4.87] [2.54]
Corporate governance
Log (Total Salary) 0.0260*** 0.0133** 0.0104**
[4.80] [2.35] [2.01]
PerStateOwn −0.0001
[−0.29]
PerStateOwn*Post 0.0000
[0.08]
% Independent Directors −0.0005 0.0001 0.0001
[−0.70] [0.12] [0.26]
Board Size 0.0005 0.0003 0.0007
[0.37] [0.22] [0.57]
Ownership Concentration −0.0009 −0.0012*** −0.0010***
[−1.49] [−3.79] [−4.48]
HHI Industry Index 0.0019 −0.0002 −0.0001
[1.52] [−0.45] [−0.69]
Firm characteristics
Log (Cash) −0.0000 −0.0044 0.0020 −0.0053 −0.0045
[−0.00] [−1.53] [0.57] [−1.47] [−1.29]
Leverage −0.0001 −0.0003*** −0.0003 −0.0003*** −0.0003***
[−1.07] [−2.91] [−1.47] [−2.76] [−3.07]
Tangibility −0.0004** −0.0007*** −0.0003 −0.0006** −0.0006***
[−2.20] [−4.66] [−0.97] [−2.25] [−3.14]
Profitability −0.0008** −0.0006 −0.0008** −0.0008 −0.0009**
[−2.21] [−1.59] [−2.00] [−1.26] [−2.27]
Log (Sales) −0.0043 0.0000 −0.0056 −0.0008 −0.0009
[−1.23] [0.01] [−1.09] [−0.17] [−0.28]
Sales Growth 0.0000* 0.0000 0.0000 0.0000 0.0000
[1.69] [0.76] [0.73] [1.27] [1.54]
Log (Age) 0.0042 −0.0053 0.0247* −0.0087 −0.0071
[0.76] [−1.00] [1.96] [−1.28] [−1.10]
Mkt-to-Book Ratio 0.0012** 0.0016*** −0.0001 0.0016*** 0.0017***
[2.03] [2.95] [−0.23] [3.19] [3.57]
Firm Size 0.0247*** 0.0216*** 0.0322*** 0.0225*** 0.0242***
[5.24] [4.95] [5.57] [3.58] [4.83]
Industry FE Yes No No No No No
Province FE No Yes No No Yes No
Firm FE No No Yes Yes No No
Cluster Firm Firm Firm Firm and Province Firm and Industry Firm and Province
Observations 9956 9956 9956 10,147 9826 9826
Adjusted R-squared 0.598 0.590 0.212 0.711 0.591 0.588
This table presents panel regressions of the determinants of Research Intensity. Variables are defined in Appendix A1. Specifications 1–3 present
regression results with Firm Characteristics, with Industry, Province, and Firm Fixed Effects, respectively. Specifications 4 and 5 present regression
results with Corporate Governance Characteristics without controls for State Ownership, and with Firm Fixed Effects and Province Fixed Effects, re-
spectively. Specification 6 presents regression results with all variables jointly. Standard errors are clustered at firm level for Models 1–3, at both
firm and industry levels for Model 5, and at both firm and province levels for Models 4 and 6. *, **, and *** denote statistical significance at the
10%, 5%, and 1% levels, respectively.
policy implementation variable (Post). Specifications 1, 2, and 3 show the regression results including firm characteristics with fixed
effects for the industry, province, and firm levels, respectively.
Specifications 4 and 5 show the regression results with the logarithms of total salary, percentage of independent directors, board
size, ownership concentration, and the HHI Industry Index. Specification 6 presents the regression results with all variables jointly,
and with the interaction term of the percentage of state ownership and our policy variable, the Post dummy.
Overall, for all specifications, we find that Research Intensity is consistently and statistically significantly higher after 2008 (see the
positive coefficients for Post in Table 4). These effects are significant at a 1% level, and indicate that, after the policy change, Research
Intensity increased from about 0.0237 percentage points (Table 4, specification 3) to 0.0384 percentage points (Table 4, specification
2). This is about a 50% increase, which is economically significant. These results provide support for our Hypothesis 1, that Chinese
companies increased their research spending significantly in response to the governmental policy change.
10
In addition, the results in Table 4 are consistent with our theoretical arguments for Hypothesis 2a, and provide support for the
notion that better compensated (see the variable Total Salary) top management team members (directors, supervisors, and executives)
are associated with higher Research Intensity. Total annual salary is statistically significant at a 1% level in specification 4, and at a 5%
level in specifications 5 and 6. We provide more detailed evidence in the subsequent analyses as to which salary component—fixed or
performance-based compensation—drives this result.
The results in Table 4 also show that ownership concentration is negatively correlated with Research Intensity, supporting the idea
of a “dark” side to ownership concentration and supporting Hypothesis 3b. It is statistically significant at a 1% level in both spe-
cifications 5 and 6. As outlined in the introduction, the Chinese government changed its strategy toward higher innovation levels in
2009. It is likely that this affected SOEs differently than non-SOEs, because, on average, SOEs enjoy more valuable political con-
nections that could provide a comparative advantage, especially for, e.g., patent approval and incentive schemes, or the “reward
system” (see, e.g., Fan et al., 2008; Huang et al., 2011). Surprisingly, we find no evidence that state ownership is related to Research
Intensity (see Table 4, coefficients for PerStateOwn and PerStateOwn * Post).
A further key driver of innovation is the overall competitiveness of the market. We expect to observe a negative correlation
between the level of market dominance enjoyed by a single company (quasi-monopoly) and the incentives for management to invest
in innovation, simply because customers have no other choices. On the contrary, in a more competitive market, we expect to observe
a greater need to differentiate oneself from peers. In this context, innovation is one of the key drivers of future competitive ad-
vantages and productivity (Scherer, 1984). However, we find no relationship between market competitiveness and a firm's Research
Intensity (see Table 4, coefficients for the Herfindahl-Hirschman index (HHI)).
In addition to our main variables of interest, Table 4 displays some other intriguing results. First, we find that increases in firms'
leverage, tangibility, and profitability are negatively correlated with Research Intensity. However, these results are not consistent
across all specifications. Second, the market-to-book ratio suggests that larger firms are more likely to spend more on research.
To examine the interplay between government incentives and performance-based compensation, we next divide the sample
period into two subperiods—before and after 2008—and isolate the performance-based compensation from top management team
members' (directors, supervisors, and executives) total compensation. We focus on top management team members instead of top
executives, because R&D-related decisions are usually made by lower-ranking officers.9
We measure performance-based compensation by either total number of shares, which proxies for sensitivity and is comparable to
the “delta” (given that options are very rarely granted), or total value of stock held, which proxies for management team members'
total wealth invested in the company.10
In accordance with Table 4, we find that higher Total Salary is associated with higher R&D spending before and after 2008 (see
Table 5, specification 1). However, not only is economic importance lower in response to the governmentally prescribed increase in
innovation, but statistical importance as measured by the t-value is as well. We focus on the performance-based compensation
component. In line with Hypothesis 2b, we find it is only related to Research Intensity, for total number of shares and total value of
shares for the chairman and for the board, after the government program began, but not before (see Table 5, specifications 2–5).
Note that the absolute difference between the coefficients on the performance-based compensation components before and after
2008 is not economically large. The coefficient is not statistically different from zero before 2008, but becomes statistically different
after 2008. This means the coefficient is significantly larger after 2008, but not before, where no difference and thus no relationship
between incentive-based compensation and research intensity was found. This is the first evidence that governmental R&D incentives
are strongly likely to impact actual company R&D spending when top management is incentivized with performance-based com-
pensation.
5.2. Alternative explanations: Influence of corporate fraud and CEO turnover on research intensity, and financial crisis
5.2.1. Fraudster companies

There are many sound arguments for why a proclivity toward fraud can correlate with innovation. Gino and Ariely (2012) claim
that more creative economic actors are less likely to be rule-followers. They tend to interpret rules less strictly, and to operate in more
of a “grey zone.” Transferring this behavior to organizations, we observe that less restrictive behavior can result in less pressure from
monitors, such as the board or shareholders (see Oliver, 1991), faster transitions from an experimental to an exploration stage (see
Benner and Tushman, 2002), and faster adoption of best practices (see Westphal et al., 1997). As a result, fraudulent companies may
be able to achieve a comparative advantage over rule-following companies (as long as the fraud is not revealed), because they are
better able to attract external resources such as research grants. They may also have higher ratings (by, e.g., manipulating accounts),
save resources, and do not bear the true costs of their businesses.
The environment in China offers a unique and interesting research setting because the government strongly encourages more
research spending and patent applications, which led to an enormous increase in R&D volume over the past decade by a factor of
9
To examine whether our results hold when focusing exclusively on top executives, we re-run our main Table 4 using the variable “Top 3
Executives' Pay/Salary.” We then re-test the impact of performance-based compensation in Table 5 using the variables “Shares owned by Execu-
tives” and “Shares owned by Management.” Our results remain the same. For more details, see Tables A13 and A14 in the Online Appendix.
10
We use the number of shares held to measure performance-based compensation (or incentives), not managerial ownership. The latter would be
important when measuring possible entrenchment effects by, e.g., firm managers misusing voting power. In our setting, we argue that the number of
shares held is a more suitable proxy for the sensitivity of top management's wealth with respect to stock price performance.
11
Table 5
Impact of performance-based compensation on research intensity before and after policy change.
F. Zhan, et al.
(1) (1) (2) (2) (3) (3) (4) (4) (5) (5)
Before 2008 After 2008 Before 2008 After 2008 Before 2008 After 2008 Before 2008 After 2008 Before 2008 After 2008
Log (Total Log (Total Log (Total # Log (Total # Log (Total # Log (Total # Log (Total Value Log (Total Value Log (Total Value Log (Total Value
Salary) Salary) Share) Share) Chair) Chair) Share) Share) Chair) Chair)
Constant −0.6768*** −0.1733*** −0.4134** −0.1273 −0.5086 −0.1988 −0.4027* −0.1182 −0.3671 −0.1955
[−3.47] [−3.06] [−1.97] [−1.39] [−1.59] [−1.63] [−1.88] [−1.29] [−1.25] [−1.60]
Lag RI 0.2049*** 0.9003*** 0.1880*** 0.8941*** 0.1966*** 0.8962*** 0.1879*** 0.8952*** 0.1966*** 0.8962***
[4.47] [44.69] [3.14] [36.11] [2.91] [29.39] [3.14] [36.20] [2.91] [29.43]
Log (Total Salary) 0.0421*** 0.0057*
[3.80] [1.86]
Log (Total # Shares 0.0030 0.0035***
Board) [0.82] [2.90]
Log (Total # Shares 0.0023 0.0032**
Chair) [0.47] [2.07]
Log (Total Value 0.0036 0.0037***
Shares Board) [1.01] [3.03]
Log (Total Value 0.0030 0.0033**
Shares Chair) [0.62] [2.04]
Log (Cash) −0.0045 −0.0018 0.0077 −0.0024 0.0129 −0.0081 0.0079 −0.0020 0.0130 −0.0080
[−0.73] [−0.85] [0.95] [−0.64] [1.12] [−1.59] [0.96] [−0.54] [1.13] [−1.57]
12
Leverage −0.0003 −0.0002*** −0.0000 −0.0003** −0.0000 −0.0004** −0.0000 −0.0003** −0.0000 −0.0004**
[−1.61] [−2.91] [−0.08] [−2.26] [−0.02] [−2.08] [−0.03] [−2.23] [−0.02] [−2.07]
Tangibility −0.0011*** −0.0003*** −0.0014*** −0.0003* −0.0016*** −0.0005** −0.0013*** −0.0002 −0.0016*** −0.0004**
[−3.77] [−3.03] [−3.29] [−1.73] [−3.07] [−2.24] [−3.24] [−1.51] [−2.98] [−2.19]
Profitability −0.0023*** −0.0003 −0.0027** −0.0005 −0.0044*** −0.0008 −0.0027** −0.0006 −0.0045*** −0.0009
[−3.03] [−0.97] [−2.53] [−0.91] [−2.71] [−0.98] [−2.58] [−1.04] [−2.76] [−1.07]
Log(Sales) −0.0028 −0.0010 −0.0009 −0.0011 −0.0102 0.0043 −0.0006 −0.0011 −0.0100 0.0044
[−0.40] [−0.45] [−0.09] [−0.29] [−0.86] [0.90] [−0.06] [−0.29] [−0.84] [0.91]
SalesGrowth 0.0001 0.0000 0.0003 −0.0000 0.0007 −0.0000 0.0003 −0.0000 0.0007 −0.0000
[0.89] [0.38] [1.33] [−0.09] [1.35] [−0.66] [1.33] [−0.11] [1.35] [−0.70]
Log(Age) −0.0136 −0.0043 −0.0131 0.0064 −0.0191 0.0072 −0.0102 0.0089 −0.0163 0.0088
[−1.23] [−1.10] [−0.74] [0.96] [−0.75] [0.91] [−0.57] [1.29] [−0.63] [1.04]
Mkt-to-Book Ratio 0.0016 0.0011** 0.0030 0.0023** 0.0025 0.0034** 0.0029 0.0023** 0.0024 0.0033**
[1.34] [2.11] [1.60] [2.11] [0.73] [2.11] [1.58] [2.04] [0.71] [2.08]
Firm Size 0.0143* 0.0081** 0.0151 0.0075 0.0194 0.0110 0.0131 0.0059 0.0177 0.0100
[1.90] [2.45] [1.22] [1.46] [0.90] [1.55] [1.00] [1.15] [0.78] [1.41]
Province FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Cluster Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm
Observations 2259 7672 1161 3887 799 2727 1159 3880 798 2727
Adjusted R-squared 0.117 0.750 0.130 0.758 0.157 0.769 0.130 0.759 0.158 0.769
This table presents panel regression of the determinants of Incentives of Research Intensity. Variables are defined in Appendix A1. Specifications 1–5 present regression results with Firm Characteristics and
with different Compensation Measures: Log (Total Salary) (1), Log (Total # Shares Board) (2), Log (Total # Shares Chair) (3), Log (Total Value Shares Board) (4), and Log (Total Value Share Chair) (5),
respectively, with Province and Firm Fixed Effects. For each specification, we separate the data into two periods: before and after the 2008 government policy implementation. Standard errors are clustered
at firm level for all specifications. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
about 15. However, during the same time, the governance of, e.g., awarding research funds, spending, and monitoring procedures
was lacking. This created ample opportunities and incentives to misappropriate funds, and led to the appearance of “financial black
holes” (see, for example, Ordu and Schweizer, 2017).
To test for any influence of fraud or CEO turnover on companies' Research Intensity, we first provide univariate evidence, followed
by multivariate evidence.
Panel A of Table A2 reports the differences in means and medians for Research Intensity between non-fraud and fraud firms.
Overall, the mean (standard deviation) value of Research Intensity is 0.087% (0.3443%) for non-fraud firms, and 0.0961% (0.37%) for
fraud firms. These raw numbers indicate that non-fraud firms spend less on R&D than fraud firms. However, we find no statistical
significance between non-fraud and fraud firms when comparing average differences.
In panel B of Table A2, we test our hypothesis of whether enforcement actions against a fraud firm impact Research Intensity.
The results show that, before and after enforcement, the mean (standard deviation) values of Research Intensity are 0.084%
(0.3394%) and 0.1014% (0.3826%), respectively. However, the differences are again statistically insignificant at conventional
levels. Overall, these univariate tests find no statistically significant differences among R&D spending before or after enforcement
actions for fraud firms.
To test the alternative explanation of whether fraud firms are negatively associated with research intensity, we run five speci-
fications of multivariate regressions based on our baseline regression Eq. (1) for three different fraud dummy variables. We identify
“fraud” firms as those with at least one fraud enforcement action (Fraud Firm). Fraud enforcement refers to the year a firm faced an
action (Fraud Announcement); After Fraud Announcement refers to the period after the first fraud enforcement. The results are in Table
A3.
We find no difference in research spending between non-fraud and fraud firms, or before and after a fraud action for fraud firms.
All other coefficients remain qualitatively stable in comparison to our baseline estimates in Table 4, meaning there is no evidence that
fraud firms behave differently than non-fraud firms in their R&D spending decisions.
5.2.2. Turnover companies

The replacement of a top management team member, especially a CEO, is a highly important corporate event, and has long-term
effects on, e.g., marketing strategy, investment policy, and operating performance for turnover companies. Such turnovers occur
more frequently in China compared to, e.g., the U.S. (see Jiang et al., 2013). The connection between CEO turnover and “innovation”
has been discussed extensively in the literature. For example, the “quiet life” hypothesis predicts that some former CEOs tend to
underinvest in R&D in order to have less work, and are overly cautious about taking on associated risks (see Aghion et al., 2013; and
Sapra et al., 2015). Furthermore, CEOs often tend to cut back on R&D expenses at the end of their tenure, especially before re-
tirement, in order to increase earnings. Therefore, decisions about R&D expenses could be related more to top management tenure
and turnover. To explore whether a top management replacement is driving our results, we again provide univariate evidence first,
followed by multivariate evidence.
In panel C of Table A2, we test for differences in R&D spending for firms with and without a CEO turnover. The results show a
mean (standard deviation) value for Research Intensity of 0.1898 (0.5388%) for firms without a CEO turnover, and 0.0875%
(0.3465%) for firms with a turnover. The difference in mean (median) values is statistically significant at a 1% (10%) level. Overall,
firms without CEO turnovers spend much more on R&D than those with CEO turnovers.
In panel D of Table A2, we further test firms' R&D spending before and after a CEO turnover. The results show that the mean
(standard deviation) values of research are 0.1149% (0.4254%) and 0.0855% (0.3402%), respectively. However, we find a statistical
difference at only the 10% level in the mean for a change in Research Intensity after a CEO turnover, despite the fact there is evidence
of statistically significant differences for both firms. Nevertheless, these tests are not fully informative because we have not yet
controlled for, e.g., firm characteristics.
In Table A4, we test our hypothesis of whether firms with CEO turnovers are negatively correlated with Research Intensity. We
again run five regression specifications based on our baseline regression Eq. (1) for three dummy variables of the CEO turnover
indicator. The results in Table A4 consistently show that, after controlling for firm characteristics, there is no difference in research
spending between firms with and without CEO turnovers (Firms with CEO Turnover), for firms before and after turnovers (Firms after
CEO Turnover), and for the turnover year (CEO Turnover). Unlike the statistical significance found in the univariate tests, where
firms without CEO turnovers spend more on R&D than those with turnovers, we find no statistical difference after controlling for
firm characteristics. Furthermore, we find that all other results from the baseline regression in Table 4 remain qualitatively the
same.
5.2.3. Recent global financial crisis

Note that the coefficients of our Post dummy variable could be biased, because it captures both the effect of the policy change in
China as well as the impact of the recent global financial crisis. At the beginning of the financial crisis, the Chinese government
implemented an RMB 4 trillion (about U.S. $586 billion) stimulus package, in an effort to minimize the impact of the crisis. Most of
the funds were intended to be spent on “upgrading infrastructure, particularly roads, railways, airports, and the power grid; on
raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection” (see
Maidment, 2008). However, in this study, we focus on the innovative activity at a firm level, because our dependent variable is
Research Intensity. Thus, we argue that the stimulus package should have no direct impact on firms' R&D spending. There could,
however, be an indirect impact between the package and firms' R&D spending if the overall perspective is that the economy is
doing well.
13
To rule out or at least minimize this indirect impact on our results, we include companies' sales growth (variable SalesGrowth) in
our baseline regression (see Table 4). We find no consistent relationship with Research Intensity.11 Overall, given these results, our
main findings remain unchanged.
Interestingly, and unlike the stimulus package in China, the U.S. stimulus package tried to stimulate the economy by providing
“recovery rebates to individuals, incentives for business investment, and an increase in conforming and FHA (Federal Housing
Administration) loan limits” (see Economic Stimulus Act of 2008, 2008). Thus, firms in the U.S. had greater incentives to increase
their investment spending, including R&D, which was positively correlated with higher research intensity. Therefore, the U.S. sti-
mulus package worked against our results, making it “harder” to find significant outperformance in research intensity of Chinese
companies in comparison to their U.S. counterparts. Note that our policy variables China x Post (see Table 6) and Post (see Table A15
in the Appendix) continue to show positive and statistically significantly larger increases in research intensity by Chinese companies
than their U.S. counterparts after 2008. In other words, we can assume that, without the U.S. stimulus package, outperformance by
Chinese companies would have been more distinct.
5.3. Robustness checks
Finally, we conduct a series of robustness checks to explore whether our main variable of interest, the Post dummy variable,
continues to indicate an increase in research intensity in the baseline regression after the 2008 change in Chinese research policy.
First, we explore whether these results are sensitive to the calculation method of research intensity used here. For dependent
variables, we use the two alternative definitions: Research Intensity (Alternative Measures 1 and 2). We change the denominator on our
original calculation from “total assets” to “sales” (Table A5, specifications 1–3), and, following Cooper et al. (2015), to “book value of
equity” (Table A5, specifications 4–6). We also use a transformation Log (1 + Lag RI) (see Table A6).12
Overall, the results are highly similar. Most importantly, research intensity increases after 2008, from 0.0461 percentage points
(Table A5, specification 1) to 0.0859 (Table A5, specification 2). This magnitude is of similar economic importance as the 50%
relative increase in research intensity.
Second, our main Tables 4 and 5 are based on a sample Chinese firm. All variables for the related empirical analyses are based on
data from various CSMAR databases, which only cover Chinese firms. When we change that focus, and compare Research Intensity
with their U.S. counterparts, we cannot obtain all the necessary data solely from CSMAR. The challenge is that the CSMAR databases
generally use different variables than their U.S. counterparts, CRSP, Compustat, and Execucomp. Thus, we follow Tan et al. (2015),
which is closest to our work, and only use variables available in both CSMAR and in the U.S. counterparts. We test whether our results
hold (see Tables A7 and A8 in the appendix). Neither change affects our main variable of interest. We find consistent and significant
evidence that listed Chinese companies increased their research intensity after 2008.
Third, many companies in our sample do not invest in R&D at all, which results in the observed skewed distribution of Research
Intensity. To test whether our results are affected by this issue, we change Research Intensity to a dummy variable (RI Dummy), which
equals 1 when Research Intensity > 0, and 0 otherwise (see Table A9). The results are very similar to our main results in Table 4,
except for those on sales. However, and most importantly, we find that our policy variable is consistently positively associated with
the likelihood of R&D spending.
Note that research spending may be highly correlated with firm profitability. This is an important issue, because it could indicate
a self-selection bias in our original analysis. To overcome any potential sample selection problem, we re-estimate our original spe-
cification using Heckman's (1979) two-stage procedure. The results are in Tables A10 (comparable to the baseline model in Table 4)
and Table A11 (comparable to the baseline model in Table A7 that uses only the Tan et al. (2015) control variables) in the appendix.
In all tests, the selection model is a probit model that estimates the likelihood of firms' research spending during the sample period.
The variables are changes in cash, ROA, and changes in sales.
Comparing the results in Tables 4 and A10, we find that the coefficient results for Heckman's (1979) two-stage procedure are very
similar to those in Table 4. After controlling for the selection bias, we find that the Chinese government change in research strategy
increased the Research Intensity of Chinese firms from 0.024% (Table A10, specification 5) to 0.0377% (Table A10, specification 2).
Using the control variables as in Tan et al. (2015) and Heckman's (1979) procedures, we find similar results. Research Intensity has
increased from 0.0206% (Table A11, specification 4) to 0.0325% (Table A11, specification 2).
To summarize, our various robustness checks provide no evidence that would alter our main result of an increase in Research
Intensity after implementation of the change.
Our second main analysis, where we investigate how top management incentives influence Research Intensity, may be affected by a
causality issue. Previous literature showed that CEOs can manipulate R&D spending to create positive adjustments in their
11
In unreported results, we also test for robustness at the “macro level,” and include GDP per capita. We re-test all models in our main table in the
manuscript. In our baseline regression, we find a positive and significant relationship between GDP per capita and our dependent variable in
specifications 1–5, but this positive and statistically significant relationship disappears when we add in all the control variables. More importantly,
our main variable – Post – remains statistically significant in all specifications at least at the 5% level. Tables are available from the authors upon
request.
12
We decided against using one of the alternative measures for our main metric, for the following reasons. Using “market value of equity” as the
denominator implies a relationship to current market valuation, and is also strongly related to the financing mix (leverage). In theory, this would not
necessarily imply a tie to research intensity. Using total sales, however, has the disadvantage of implying that companies such as Apple, which have
outsize sales, have rather low research intensities, even if their absolute amount of R&D spending is enormous.
14
F. Zhan, et al.
Table 6
The impact of the 12th five-year plan on research intensity—Panel regression.
(1a) (1b) (2a) (2b) (3a) (3b) (4a) (4b) (5a) (5b) (6a) (6b)
Constant 6.778⁎⁎⁎ 7.298⁎⁎⁎ 7.597⁎⁎⁎ 5.248⁎⁎⁎ 8.810⁎⁎⁎ 6.363⁎⁎⁎ 8.820⁎⁎⁎ 6.369⁎⁎⁎ 4.776⁎⁎⁎ 4.338⁎⁎⁎ 4.127⁎⁎⁎ 4.167⁎⁎⁎
(3.27) (18.10) (17.49) (16.75) (15.65) (16.60) (15.62) (16.54) (15.43) (17.81) (14.56) (18.74)
Lag RI 0.731⁎⁎⁎ 0.768⁎⁎⁎ 0.866⁎⁎⁎ 0.886⁎⁎⁎ 0.756⁎⁎⁎ 0.781⁎⁎⁎ 0.759⁎⁎⁎ 0.783⁎⁎⁎ 0.849⁎⁎⁎ 0.859⁎⁎⁎ 0.925⁎⁎⁎ 0.929⁎⁎⁎
(123.48) (137.69) (119.34) (130.78) (129.92) (139.46) (130.28) (139.85) (178.67) (187.32) (207.76) (217.79)
China x Post 1.506⁎⁎⁎ 2.266⁎⁎⁎ 1.157⁎⁎⁎ 1.765⁎⁎⁎ 1.680⁎⁎⁎ 2.415⁎⁎⁎ 1.676⁎⁎⁎ 2.422⁎⁎⁎ 0.528⁎⁎⁎ 1.383⁎⁎⁎ 0.826⁎⁎⁎ 1.223⁎⁎⁎
(4.13) (5.51) (4.41) (6.01) (4.57) (5.85) (4.55) (5.85) (3.08) (7.13) (5.54) (7.30)
Post − 1.202⁎⁎⁎ − 1.927⁎⁎⁎ − 0.978⁎⁎⁎ − 1.683⁎⁎⁎ − 1.503⁎⁎⁎ − 2.200⁎⁎⁎ − 1.494⁎⁎⁎ − 2.192⁎⁎⁎ − 0.471⁎⁎⁎ − 1.469⁎⁎⁎ − 0.705⁎⁎⁎ − 1.021⁎⁎⁎
(− 5.16) (− 5.47) (− 5.93) (− 6.80) (− 6.46) (− 6.23) (− 6.41) (− 6.19) (− 4.31) (− 8.70) (− 7.55) (− 7.13)
China − 3.984⁎⁎⁎ − 4.180⁎⁎⁎ − 2.496⁎⁎⁎ − 2.894⁎⁎⁎ − 3.254⁎⁎⁎ − 3.875⁎⁎⁎ − 3.265⁎⁎⁎ − 3.898⁎⁎⁎ − 1.440⁎⁎⁎ − 2.238⁎⁎⁎ − 1.299⁎⁎⁎ − 1.734⁎⁎⁎
(− 11.29) (− 10.75) (− 9.85) (− 10.23) (− 9.57) (− 10.01) (− 9.58) (− 10.04) (− 9.13) (− 12.28) (− 9.18) (− 10.73)
Leverage 0.000 −0.001 −0.007⁎⁎⁎ −0.008⁎⁎⁎ 0.002 −0.000 0.002⁎ 0.001 −0.003⁎⁎⁎ 0.003⁎⁎⁎ −0.010⁎⁎⁎ −0.009⁎⁎⁎
(0.14) (−0.69) (−4.68) (−5.20) (1.32) (−0.09) (1.92) (0.53) (−2.95) (3.28) (−8.70) (−7.99)
Tangibility −0.034⁎⁎⁎ −0.017⁎⁎⁎ −0.015⁎⁎⁎ −0.012⁎⁎⁎ −0.027⁎⁎⁎ −0.013⁎⁎⁎ −0.028⁎⁎⁎ −0.014⁎⁎⁎ −0.023⁎⁎⁎ −0.026⁎⁎⁎ −0.009⁎⁎⁎ −0.012⁎⁎⁎
(−6.36) (−4.04) (−3.87) (−3.49) (−5.25) (−3.18) (−5.48) (−3.27) (−9.85) (−12.94) (−4.14) (−6.59)
15
Profitability 0.003 0.003 0.017⁎⁎⁎ 0.016⁎⁎⁎ 0.003 0.002 0.004⁎ 0.003 −0.019⁎⁎⁎ −0.036⁎⁎⁎ −0.033⁎⁎⁎ −0.034⁎⁎⁎
(1.28) (1.32) (4.04) (3.98) (1.35) (0.98) (1.92) (1.53) (−8.63) (−18.10) (−12.86) (−13.80)
Log (Sales) −0.720⁎⁎⁎ −0.641⁎⁎⁎ −0.403⁎⁎⁎ −0.345⁎⁎⁎ −0.639⁎⁎⁎ −0.586⁎⁎⁎ −0.643⁎⁎⁎ −0.588⁎⁎⁎ −0.079⁎⁎⁎ −0.080⁎⁎⁎ 0.005 −0.031⁎
(−17.41) (−17.27) (−11.61) (−11.15) (−16.25) (−16.01) (−16.34) (−16.05) (−3.49) (−3.74) (0.24) (−1.69)
Sales Growth 0.004⁎⁎⁎ 0.004⁎⁎⁎ 0.001⁎⁎ 0.001⁎ 0.003⁎⁎⁎ 0.003⁎⁎⁎ 0.003⁎⁎⁎ 0.003⁎⁎⁎ −0.001⁎⁎⁎ −0.001⁎ 0.001⁎⁎ 0.001⁎⁎⁎
(3.97) (4.00) (2.02) (1.65) (3.14) (2.85) (3.07) (2.77) (−2.68) (−1.74) (2.31) (2.70)
Log (Age) 0.037 0.237⁎⁎ 0.008 −0.003 0.291⁎⁎⁎ 0.363⁎⁎⁎ 0.278⁎⁎⁎ 0.358⁎⁎⁎ −0.378⁎⁎⁎ −0.452⁎⁎⁎ −0.534⁎⁎⁎ −0.623⁎⁎⁎
(0.30) (2.24) (0.11) (−0.04) (2.80) (3.66) (2.68) (3.60) (−4.94) (−5.77) (−8.89) (−10.41)
Industry FE Yes No Yes No Yes No Yes No Yes No Yes No
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year FE No Yes No Yes No Yes No Yes No Yes No Yes
Observations 16,937 16,937 9173 9173 16,162 16,162 16,171 16,171 14,116 14,116 14,192 14,192
R2 0.710 0.708 0.822 0.821 0.723 0.720 0.724 0.720 0.863 0.861 0.869 0.869
This table presents the panel regression results for the determinants of U.S. and Chinese Research Intensity for the matched sample using all control variables as in Tan et al. (2015). Specification 1 gives
results for Ritter's (1991) matching approach; specification 2 gives results for Spiess and Affleck-Graves' (1995) approach; specification 3 gives results for Michaely et al.'s (1995) approach; specification 4
for the same industry and market-to-book approach; specification 5 for nearest neighbor matching with absolute values; and specification 6 for nearest neighbor matching with mean adjusted values.
Variant “a” uses Industry and Firm Fixed Effects; variant “b” uses Firm and Year Fixed Effects. Standard errors are clustered at Firm level for all specifications, in line with Tan et al. (2015). *, **, and ***
denote statistical significance at the 10%, 5%, and 1% levels, respectively.
compensation. Cheng (2004), for example, finds that opportunistic reductions in R&D spending are more likely when CEOs are closer
to retirement (the horizon problem), and when companies face relatively small earnings declines (the benchmarking or myopia
problem). In these cases, compensation committees may try to reduce CEOs' incentives to cut R&D spending by increasing their
option grants (performance-based compensation). This is an example of the causality issue.
To test for potential reverse causality, we re-run our main table using performance-based compensation as the dependent variable,
and one-year lagged research intensity as a dependent variable (see Table A12). If boards or the chairman manipulate R&D spending
to influence compensation, we would expect to observe a statistically significant influence. Our evidence does not support that
theory.13 In fact, our results suggest that, under the reform, performance-based compensation increased, creating greater incentives
for the board to increase research intensity. There is thus no evidence of a causality issue.
5.4. Comparison of Chinese and U.S. research intensity
Thus far, we have only analyzed Chinese publicly listed companies, and found, in line with Hypothesis 1, that their Research
Intensity increased significantly after 2008. However, this increase could simply coincide with a global trend of increased R&D
spending. This is one of the reasons we use a panel setting (as well as a DiD setting as a robustness check) to explore whether Chinese
companies “outpaced” their U.S. peers in response to the policy change, or just reduced the gap. Our evidence will help put China's
efforts and ambitions to become a leading innovator into perspective.
First, we provide results in a panel regression setting, where we also control for firm characteristics that could potentially be
influencing factors on the increased Research Intensity between Chinese and U.S. peer companies after 2008. A positive sign on the
coefficient of the China x Post variable would support Hypothesis 4, and the view that Chinese companies at least reduced the gap
with their U.S. peers in response to the policy change. Table 6 shows that, overall, Research Intensity for U.S. and Chinese companies
decreased after 2008 to approximately 2.20 percentage points (Table 6, specification 3b). This is an average decrease of 0.471
percentage points (see coefficients for the variable Post in Table 6, specification 5a), and is at least partially attributable to the
beginning of and the consequences of the recent financial crisis.
Next, to determine whether Chinese companies overtook their U.S. peers in Research Intensity, we examine the coefficient related
to the China dummy variable (China). We find that, on average, Chinese companies have a lower Research Intensity over the entire
observation period, ranging from a high of 4.18 percentage points (Table 6, specification 1b) to a low of 1.299 (Table 6, specification
6a). However, there is strong support for Hypothesis 4, that Chinese companies increased statistically and economically significantly
their Research Intensity after the policy change (see coefficients for the variable China x Post in Table 6).
To summarize, our findings clearly show that Chinese companies caught up with their U.S. peers after the policy change, but
have not yet overtaken them. Ultimately, this means that Research Intensity in China continues to lag somewhat behind that in
the U.S.
As a robustness check, we run a difference regression between research intensity in China and the U.S. (see Table A15 in the
appendix). We find that the magnitude and statistical significance of the DiD coefficients (Post) are highly similar to those of the China
x Post variable in the previous regressions. Consistent with all of our matching algorithms, Table A15 shows strong support for
Hypothesis 5 (statistically significantly at a 1% level). The magnitude of the Post coefficient estimate suggests that, compared to past
levels of Research Intensity (prior to 2008), Chinese companies on average decreased their distance from U.S. peers from about 1.37
percentage points (Table A15, specification 5a) to 2.63 percentage points (Table A15, specification 3b).
6. Conclusion
This paper investigates the determinants of innovation as measured by Research Intensity in China. In contrast to the fast-growing
literature that uses patents and patent applications as a measure of innovation, we focus on the amount of money allocated to
research relative to firm size. We believe this measure allows for a more meaningful assessment of a future innovation path than the
filing of numerous patents that may be of questionable quality.
It is worthwhile to study the innovations of Chinese firms and compare them with those of their U.S. peers for several reasons.
China's economy has been on a continual path of rapid growth for several decades, and it recently overtook the U.S. economy as the
world's largest. However, its rapid growth is not limited to GDP volume; China also desires to become the world's innovation leader.
To achieve this ambitious goal, the Chinese government underwent substantial regulatory and incentive-based changes that triggered
an enormous growth in patent applications.
In this paper, we aim to determine the effectiveness of China's policy changes on the real economy, measured by, e.g., in-
dustrywide changes in research spending. We find that, in response to the Chinese government policy change, the Research Intensity of
listed Chinese firms increased statistically significantly and at an economically meaningful rate, supporting the notion of a causal
industrywide effect. Furthermore, we provide evidence that governmental support programs are more effective at increasing com-
panies' R&D spending when top management receives higher performance-based compensation.
Our measures of performance-based compensation were not related to Research Intensity before the policy change in 2008, but
were tied to it afterward. We use a difference-in-differences setting to compare the change in Research Intensity for listed Chinese and
13
We also use log(lag RI) and log(1 + lag RI) to observe whether the change in lagged Research Intensity is related to compensation. Our results
are very similar to those for lag RI.
16
U.S. peers, and find that Chinese companies increased their Research Intensity. As a result, they reduced the existing gap with the U.S.
However, the increase has not yet been sufficient to reach the levels of their U.S. counterparts.
Acknowledgments
We are grateful to the editors Zhenyu Wu and Gady Jacoby and two anonymous referees for many excellent comments and
suggestions. We thank Douglas Cumming, Sai Ding, Tinghua Duan, Wenxuan Hou, Simon Gao, Sofia Johan, Ingo Kleindienst, Meijun
Qian, and Jay Ritter, as well as the participants at the 5th Conference on Chinese Capital Markets (Winnipeg, Canada), the Academy
of International Business (New Orleans, U.S.), Financial Management Association (Boston, U.S.), the World Finance Conference (New
York City, U.S.), for helpful comments and suggestions. We also thank Aoran Zhang for excellent research assistance. This project has
been supported by the Fonds de Recherche du Québec - Société et Culture (FRQSC) (No dossier: 2017-NP-199530). Denis Schweizer
gratefully acknowledges the financial support provided through the Manulife Professorship.
Appendix
Table A1
Variable definitions.
Variable name Definition
Research Intensity (RI) Ratio of Research & Development expenses to Total Assets in percentage (Source: CSMAR China Stock Market Financial
Statement Database)
Lag RI Previous fiscal years' Research Intensity in percent
Research Intensity (Alternative Ratio of Research & Development expenses to Total Sales (Source: CSMAR China Stock Market Financial Statement Database)
Measure 1)
Research Intensity (Alternative Ratio of Research & Development expenses to Total Equity (Source: CSMAR China Stock Market Financial Statement Database)
Measure 2)
Post Dummy that equals 1 for 2009 or later
Log (Total Salary) Logarithm of total annual compensation of directors, supervisors, and executives (Source: China Listed Firms' Corporate
Governance Research Database)
Log (Total # Shares Board) Logarithm of total number of shares held at the end of year by all board members (Source: China Listed Firms' Corporate
Log (Total # Chair) Logarithm of total number of shares held at end of year by the chairman (Source: China Listed Firms' Corporate Governance
Research Database)
Log (Total Value Share Board) Logarithm of total number of shares held at end of year by all board members times mean stock price within the year (adjusted
for stock splits and dividends) in RMB (Chinese yuan) (Source: China Listed Firms' Corporate Governance Research Database)
Log (Total Value Shares Chair) Logarithm of total number of shares held at the end of year by the chairman times mean stock price within the year (adjusted
for stock splits and dividends) in RMB (Chinese yuan) (Source: China Listed Firms' Corporate Governance Research Database)
% State Ownership (PerStateO- Ratio of shares owned by the state to total number of shares outstanding in percent (Source: China Listed Firms' Corporate
wn) Governance Research Database)
% Independent Directors Ratio of independent directors to total number of directors in percent (Source: China Listed Firms' Corporate Governance
Research Database)
Board Size Total number of board members (Source: China Listed Firms' Corporate Governance Research Database)
Ownership Concentration Herfindahl-Hirschman Index for ownership calculated as the sum of the squared percentage of shares owned by top ten
shareholders
HHI Industry Index Herfindahl-Hirschman Index for industry is the sum of the squared percentage of market value of the company over the total
market value of the industry
Log (Cash) Logarithm of Cash and Cash Equivalents (Source: CSMAR China Stock Market Financial Statement Database)
Leverage Firms' Total Liability over Total Assets (Source: CSMAR China Stock Market Financial Statement Database)
Tangibility Ratio of Net Fixed Assets to Total Assets (Source: CSMAR China Stock Market Bank Loan Research Database)
Profitability Return on Total Assets (ROA) (Source: CSMAR China Stock Market Financial Statement Database)
Log (Sales) Logarithm of income from Sale of Goods or Rendering of Services (Source: CSMAR China Stock Market Financial Statements
Database)
Sales Growth Annual sales growth rate (Source: CSMAR China Stock Market Financial Statement Database)
Log (Firm Age) Logarithm of years since firm IPO (Source: CSMAR China Stock Market Trading Database)
Market to Book Ratio Ratio of firms' Market to Book Value (Source: CSMAR China Stock Market Financial Statements Database and Trading
Database)
Firm Size Logarithm of firms' Total Market Value (Source: CSMAR China Stock Market Trading Database)
Fraud Firm Dummy that equals 1 if a firm faces one or more fraud-related enforcements
Fraud Announcement Dummy that equals 1 for year a firm faces an enforcement action
After Fraud Announcement Dummy that equals 1 for all years after the year a firm faces its first fraud enforcement action
CEO Turnover Dummy that equals 1 if a CEO turnover occurred in current year t
CEO Turnover Firm Dummy that equals 1 if a firm experiences a CEO turnover during the period between 2007 and 2014
Top 3 Executives' Pay Logarithm of total annual compensation of the top 3 most highly paid executives (Source: China Listed Firms' Corporate
Log (Total Executive Share) Logarithm of total number of shares held at end of year by all executives (Source: China Listed Firms' Corporate Governance
Research Database)
Log (Total Mgmt Share) Logarithm of total number of shares held at end of year by all management (Source: China Listed Firms' Corporate Governance
Research Database)
17
Table A2
Univariate comparison tests for research intensity of Chinese firms after fraud and CEO turnover.
Panel A: Non-Fraud versus Fraud Firms Panel C: Non-CEO Turnover versus CEO Turnover Firms
Non-Fraud Firms Fraud Firms Non-CEO Turnover Firm CEO Turnover Firm
Group 0 1 Group 0 1
Mean 0.0870 0.0961 Mean 0.1898 0.0875
Standard Deviation 0.3443 0.3700 Standard Deviation 0.5388 0.3465
Median 0.0000 0.0000 Median 0.0000 0.0000
Differences in Mean (0–1) −1.1922 Differences in Mean (0–1) 3.0244***
Differences in Median (0–1) p = 0.1924 Differences in Median (0–1) p < 0.0762*
Number of Observations 6926 3375 Number of Observations 256 10,045
Panel B: Fraud Firms before and after Fraud Announcement Panel D: CEO Turnover Firms before and after CEO Turnover
Before Fraud Announcement After Fraud Announcement Before CEO Turnover After CEO Turnover
Group 0 1 Group 0 1
Mean 0.0840 0.1014 Mean 0.1149 0.0855
Standard Deviation 0.3394 0.3826 Standard Deviation 0.4254 0.3402
Median 0.0000 0.0000 Median 0.0000 0.0000
Differences in −1.3129 Differences in 1.7414*
Mean (0–1) Mean (0–1)
Differences in Median (0–1) p = 0.3040 Differences in p = 0.4974
Median (0–1)
Number of Observations 1026 2349 Number of Observations 665 9380
This table compares the mean and median of Research Intensity between Non-Fraud and Fraud Firms (panel A), before and after a fraud announcement
(panel B), firms with no CEO turnover (Non-CEO Turnover Firm), firms with CEO turnovers (CEO Turnover Firm) (panel C), and before and after a CEO
turnover (panel D).
Table A3
Multivariate analysis of research intensity and influence of fraud activity.
(1) (2) (3) (4) (5)
Constant −0.4877*** −0.3894*** −0.6142*** −0.5566*** −0.5401***

[−5.87] [−4.85] [−4.41] [−5.17] [−6.06]
Lag RI 0.7347*** 0.7530*** 0.3666*** 0.7463*** 0.7535***
[25.72] [26.35] [11.73] [16.40] [26.69]
Post 0.0326*** 0.0375*** 0.0237*** 0.0331*** 0.0305**
[4.37] [4.94] [3.39] [4.71] [2.39]
Fraud Firm 0.0046 0.0025
[0.56] [0.23]
Fraud Announcement 0.0098 0.0170* −0.0012 0.0046 0.0046
[1.05] [1.82] [−0.12] [0.54] [0.42]
After Fraud Announcement 0.0112 0.0096
[1.07] [1.07]
Corporate Governance
Log (Total Salary) 0.0136** 0.0106**
[2.49] [2.04]
[−0.27]
[0.10]
% Independent Directors 0.0001 0.0001
[0.15] [0.26]
Board Size 0.0003 0.0007
[0.25] [0.57]
Ownership Concentration −0.0012*** −0.0010***
[−3.69] [−4.51]
HHI Industry Index −0.0003 −0.0002
[−0.54] [−0.87]
Firm Characteristics
Log (Cash) 0.0000 −0.0043 0.0020 −0.0050 −0.0042
[0.01] [−1.49] [0.57] [−1.35] [−1.21]
Leverage −0.0001 −0.0003*** −0.0003 −0.0003*** −0.0003***
[−1.12] [−2.96] [−1.47] [−2.92] [−3.25]
18
Tangibility −0.0004** −0.0007*** −0.0003 −0.0006** −0.0005***

[−2.20] [−4.64] [−0.97] [−2.21] [−3.10]
Profitability −0.0008** −0.0006 −0.0008** −0.0008 −0.0009**
[−2.19] [−1.54] [−2.00] [−1.26] [−2.27]
Log (Sales) −0.0042 0.0001 −0.0056 −0.0007 −0.0007
[−1.20] [0.05] [−1.09] [−0.15] [−0.22]
SalesGrowth 0.0000* 0.0000 0.0000 0.0000 0.0000
[1.68] [0.75] [0.73] [1.18] [1.47]
Log (Age) 0.0042 −0.0050 0.0248* −0.0096 −0.0078
[0.78] [−0.96] [1.96] [−1.28] [−1.18]
Mkt-to-Book Ratio 0.0012** 0.0016*** −0.0001 0.0015*** 0.0016***
[2.02] [2.91] [−0.24] [2.95] [3.50]
Firm Size 0.0246*** 0.0215*** 0.0323*** 0.0226*** 0.0242***
[5.22] [4.93] [5.57] [3.55] [4.84]
Industry FE Yes No No No No
Province FE No Yes No Yes No
Firm FE No No Yes No No
Cluster Firm Firm Firm Firm and Industry Firm and Province
Observations 9956 9956 9956 9826 9826
Adjusted R-squared 0.598 0.591 0.212 0.591 0.588
This table presents a panel regression of the determinants of Research Intensity with firm Fraud Activities. Variables are defined in appendix Table A1.
Specifications 1–3 present regression results with Firm Characteristics, with Industry, Province, and Firm Fixed Effects, respectively. Specifications 4
and 5 present regression results with all variables jointly, with and without controls for State Ownership, and with and without Province Fixed Effects,
respectively. Standard errors are clustered at firm level for Models 1–3, at both firm and industry levels for Model 4, and at both firm and province
levels in Model 5. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Table A4
Multivariate analysis of research intensity and influence of CEO turnover.
(1) (2) (3) (4) (5)
Constant −0.4866*** −0.3834*** −0.6159*** −0.5196*** −0.5203***

[−5.87] [−4.79] [−4.42] [−5.25] [−6.09]
Lag RI 0.7346*** 0.7529*** 0.3665*** 0.7467*** 0.7537***
[25.72] [26.35] [11.74] [16.41] [26.69]
Post 0.0330*** 0.0382*** 0.0238*** 0.0346*** 0.0317**
[4.41] [5.00] [3.38] [4.80] [2.53]
Firms with CEO Turnover −0.0154 −0.0075
[−0.64] [−0.26]
CEO Turnover −0.0010 −0.0050 0.0022 −0.0045 −0.0037
[−0.18] [−0.88] [0.42] [−0.81] [−0.81]
Firms after CEO Turnover 0.0004 0.0031
[0.02] [0.14]
Log (Total Salary) 0.0131** 0.0103**
[2.36] [2.01]
[−0.30]
[0.10]
% Independent Directors 0.0001 0.0002
[0.15] [0.29]
Board Size 0.0005 0.0008
[0.34] [0.64]
[−3.76] [−4.43]
[−0.46] [−0.70]
Log (Cash) −0.0000 −0.0044 0.0020 −0.0053 −0.0046
[−0.00] [−1.53] [0.56] [−1.49] [−1.30]
Leverage −0.0001 −0.0003*** −0.0003 −0.0003*** −0.0003***
[−1.06] [−2.85] [−1.48] [−2.68] [−2.98]
Tangibility −0.0004** −0.0007*** −0.0003 −0.0006** −0.0006***
[−2.21] [−4.66] [−0.98] [−2.27] [−3.13]
Profitability −0.0008** −0.0006* −0.0008** −0.0008 −0.0009**
[−2.24] [−1.65] [−1.98] [−1.30] [−2.30]
Log (Sales) −0.0043 −0.0000 −0.0055 −0.0009 −0.0009
[−1.24] [−0.02] [−1.07] [−0.18] [−0.29]
19
SalesGrowth 0.0000* 0.0000 0.0000 0.0000 0.0001

[1.67] [0.83] [0.66] [1.28] [1.57]
Log (Age) 0.0042 −0.0050 0.0246* −0.0080 −0.0069
[0.77]* [−0.95] [1.94] [−1.08] [−1.16]
Mkt-to-Book Ratio 0.0012** 0.0016*** −0.0001 0.0016*** 0.0017***
[2.03] [2.95] [−0.23] [3.19] [3.59]
Firm Size 0.0247*** 0.0216*** 0.0323*** 0.0225*** 0.0242***
[5.24] [4.95] [5.58] [3.58] [4.84]
Industry FE Yes No No No No
Province FE No Yes No Yes No
Cluster Firm Firm Firm Firm and Industry Firm and Province
Observations 9956 9956 9956 9826 9826
This table presents a panel regression of the determinants of Research Intensity with firm CEO Turnover Activities. Variables are defined in Appendix
Table A1. Specifications 1–3 present regression results with Firm Characteristics, with Industry, Province, and Firm Fixed Effects, respectively.
Specifications 4 and 5 present regression results with all variables jointly, with and without controls for State Ownership, and with and without
Province Fixed Effects, respectively. Standard errors are clustered at firm level for Models 1–3, at both firm and industry levels for Model 4, and at
both firm and province levels for Model 5. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Table A5
Multivariate analysis of research intensity using alternative measures 1 and 2.
(1) (2) (3) (4) (5) (6)
Constant −0.6566*** −1.3014*** −1.0739*** −0.9274*** −1.4101*** −1.5095***

[−3.57] [−4.33] [−6.73] [−4.14] [−4.47] [−5.75]
Lag RI 0.6993*** 1.3540*** 1.3609*** 0.7370*** 1.5760*** 1.5862***
[13.04] [13.92] [21.75] [13.61] [16.58] [26.82]
Post 0.0461*** 0.0859*** 0.0845*** 0.0521*** 0.0540*** 0.0567**
[4.19] [5.73] [3.28] [3.82] [2.90] [2.13]
Log (Total Salary) 0.0589*** 0.0144 0.0104 0.0576*** 0.0209* 0.0157
[5.19] [1.08] [0.93] [4.28] [1.78] [1.12]
PerStateOwn −0.0002 0.0001
[−0.35] [0.09]
PerStateOwn*Post −0.0001 0.0000
[−0.12] [0.03]
% Independent Directors −0.0006 −0.0002 0.0000 −0.0002 0.0009 0.0008
[−0.41] [−0.13] [0.01] [−0.10] [0.50] [0.48]
Board Size 0.0021 −0.0021 −0.0018 0.0014 0.0060** 0.0063*
[0.88] [−0.71] [−0.69] [0.43] [2.05] [1.90]
Ownership Concentration −0.0034*** −0.0024** −0.0021*** −0.0016 −0.0030*** −0.0029***
[−3.78] [−2.43] [−3.41] [−1.08] [−4.05] [−3.69]
HHI Industry Index 0.0050* −0.0001 −0.0002 0.0047* −0.0001 −0.0001
[1.91] [−0.17] [−0.35] [1.72] [−0.10] [−0.16]
Log (Cash) 0.0106 0.0105 0.0001 0.0019
[1.49] [1.33] [0.01] [0.21]
Leverage −0.0006*** −0.0006*** 0.0008** 0.0008***
[−2.86] [−2.90] [2.36] [2.90]
Tangibility −0.0010** −0.0007* −0.0017*** −0.0015***
[−2.19] [−1.65] [−2.80] [−3.04]
Profitability −0.0023* −0.0024*** −0.0040*** −0.0041***
[−1.72] [−3.39] [−2.87] [−3.72]
Log (Sales) −0.0466*** −0.0450*** 0.0190 0.0204**
[−2.97] [−5.88] [1.42] [2.11]
SalesGrowth 0.0001 0.0001 0.0001 0.0001
[1.33] [1.28] [1.18] [1.40]
Log (Age) −0.0226 −0.0226 0.0132 0.0109
[−1.56] [−1.41] [0.91] [0.88]
Mkt-to-Book Ratio 0.0016 0.0018 0.0091*** 0.0094***
[0.83] [1.02] [4.04] [4.72]
Firm Size 0.0812*** 0.0822*** 0.0326** 0.0335***
[4.56] [6.52] [2.33] [2.93]
Industry FE No No No No No No
Firm FE Yes No No Yes No No
20
Cluster Firm and Firm and Industry Firm and Province Firm and Province Firm and Industry Firm and Province
Province
Observations 10,108 9801 9801 10,147 9826 9826
This table replicates Table 4, but replaces the dependent variable Research Intensity with Research Intensity (Alternative Measure 1) (specifications
1–3) and Research Intensity (Alternative Measure 2) (specifications 4–6). Variables are defined in Appendix A1. Specifications 1 and 4 present
regression results with Corporate Governance Characteristics and Firm Fixed Effects. Specifications 2 and 4, and 5 and 6, present regression results with
all variables jointly, with and without controlling for State Ownership, and with and without Province Fixed Effects, respectively. Standard errors are
clustered at firm and province levels for specifications 1, 3, 4, and 6, and at both firm and industry levels for specifications 2 and 5. *, **, and ***
denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Table A6
Multivariate analysis of log (1+Research Intensity).
(1) (2) (3) (4) (5) (6)
Constant −0.3085*** −0.2433*** −0.3579*** −0.2317*** −0.3310*** −0.3226***

[−6.02] [−4.95] [−4.34] [−3.79] [−5.38] [−6.52]
Log (1 + Lag RI) 0.7377*** 0.7577*** 0.3627*** 0.3502*** 0.7538*** 0.7611***
[27.08] [27.93] [11.94] [16.11] [17.12] [25.41]
Post 0.0201*** 0.0236*** 0.0144*** 0.0155*** 0.0215*** 0.0202**
[4.34] [4.99] [3.40] [4.09] [4.82] [2.47]
Log (Total Salary) 0.0158*** 0.0087** 0.0069**
[4.21] [2.42] [2.25]
[−0.20]
PerStateOwn*Post −0.0000
[−0.01]
% Independent Directors −0.0006 −0.0001 −0.0001
[−1.30] [−0.31] [−0.26]
Board Size 0.0006 0.0002 0.0005
[0.68] [0.29] [0.68]
Ownership Concentration −0.0005* −0.0008*** −0.0006***
[−1.67] [−3.97] [−4.40]
HHI Industry Index 0.0011 −0.0001 −0.0001
[1.47] [−0.42] [−0.69]
Log (Cash) −0.0002 −0.0030* 0.0013 −0.0037* −0.0032
[−0.11] [−1.76] [0.57] [−1.75] [−1.50]
Leverage −0.0001 −0.0002*** −0.0002* −0.0002*** −0.0002***
[−1.39] [−3.16] [−1.73] [−3.04] [−3.28]
Tangibility −0.0003** −0.0004*** −0.0002 −0.0004** −0.0004***
[−2.15] [−4.83] [−1.00] [−2.26] [−3.14]
Profitability −0.0006** −0.0005* −0.0006** −0.0006 −0.0007**
[−2.55] [−1.90] [−2.28] [−1.44] [−2.46]
Log(Sales) −0.0024 0.0003 −0.0041 −0.0003 −0.0004
[−1.13] [0.15] [−1.23] [−0.12] [−0.19]
SalesGrowth 0.0000* 0.0000 0.0000 0.0000 0.0000
[1.66] [0.93] [1.09] [1.30] [1.48]
Log(Age) 0.0028 −0.0031 0.0166** −0.0055 −0.0046
[0.84] [−0.96] [2.12] [−1.31] [−1.14]
Mkt-to-Book Ratio 0.0006* 0.0009*** −0.0002 0.0009*** 0.0010***
[1.81] [2.86] [−0.66] [2.97] [3.41]
Firm Size 0.0157*** 0.0136*** 0.0197*** 0.0141*** 0.0151***
[5.47] [5.20] [5.54] [3.80] [5.15]
Observations 9956 9956 9956 10,147 9826 9826
This table presents panel regressions of the determinants of Log(1 + Research Intensity). Variables are defined in Appendix Table A1. Specifications
1, 2, and 3 present regression results with Firm Characteristics, and with Industry, Province, and Firm Fixed Effects, respectively. Specifications 4 and 5
present regression results with Corporate Governance Characteristics without controls for State Ownership, and with Firm Fixed Effects and Province
Fixed Effects, respectively. Specification 6 presents regression results with all variables jointly. Standard errors are clustered at firm level for Models
1–3, at both firm and industry levels for Model 5, and at both firm and province levels for Models 4 and 6. *, **, and *** denote statistical
significance at the 10%, 5%, and 1% levels, respectively.
21
Table A7
Robustness check using Tan et al.'s (2015) control variables.
(1) (2) (3) (4) (5)
Constant 0.0428 −0.0632 −0.1137 −0.1113*** −0.0632

[0.85] [−1.30] [−1.32] [−3.24] [−0.86]
Lag RI 0.7367*** 0.7544*** 0.3650*** 0.7367*** 0.7544***
[25.68] [26.28] [11.54] [27.91] [16.02]
Post 0.0325*** 0.0372*** 0.0206*** 0.0325*** 0.0372***
[4.43] [4.97] [3.00] [5.03] [6.70]
Leverage −0.0002** −0.0003*** −0.0003* −0.0002** −0.0003***
[−2.04] [−3.54] [−1.68] [−2.02] [−3.20]
Tangibility −0.0005*** −0.0007*** −0.0005* −0.0005** −0.0007**
[−2.81] [−4.80] [−1.80] [−2.53] [−2.36]
Profitability −0.0002 −0.0000 −0.0002 −0.0002 −0.0000
[−0.50] [−0.03] [−0.64] [−0.56] [−0.02]
SalesGrowth 0.0001* 0.0000 0.0000 0.0001** 0.0000
[1.93] [1.21] [0.86] [1.97] [0.93]
Log (Age) 0.0075 −0.0024 0.0382*** 0.0075 −0.0024
[1.40] [−0.46] [3.07] [1.20] [−0.41]
Log (Sales) 0.0046** 0.0034 0.0050 0.0046*** 0.0034
[2.06] [1.56] [1.15] [2.98] [1.05]
Industry FE Yes No No Yes No
Province FE No Yes No No Yes
Cluster Firm Firm Firm Firm and Province Firm and Industry
Observations 10,038 10,038 10,038 10,038 10,038
This table presents panel regressions of determinants for Research Intensity using all control variables, as in Tan et al. (2015). Variables are defined in
Appendix Table A1. Specifications 1–3 present results controlling for Industry, Province, and Firm Fixed Effects, respectively. Specifications 4 and 5
present regression results with Industry Fixed Effects and Province Fixed Effects, respectively. Standard errors are clustered at firm level for Models
1–3, at both firm and province levels for Model 4, and at both firm and industry levels for Model 5. *, **, and *** denote statistical significance at the
Table A8
Robustness check for alternative measures for research intensity 1 and 2 and using Tan et al.'s (2015) control variables.
(1) (2) (3) (4) (5) (6)
Alternative Measure 1 Alternative Measure 2
Constant 0.1551 0.0086 0.1551 −0.6502** −0.6168*** −0.6502*

[0.94] [0.07] [0.69] [−2.21] [−2.70] [−1.73]
Lag RI 0.6326*** 0.6219*** 0.6326*** 0.4481*** 0.4362*** 0.4481***
[11.65] [10.82] [9.86] [3.03] [2.95] [3.26]
Post 0.1294*** 0.1162*** 0.1294*** 0.0929*** 0.0758*** 0.0929**
[6.12] [6.19] [6.47] [2.59] [2.61] [2.51]
Leverage −0.0013*** −0.0009*** −0.0013*** 0.0002 0.0006 0.0002
[−3.52] [−3.08] [−3.32] [0.27] [0.84] [0.30]
Tangibility −0.0019*** −0.0010 −0.0019*** −0.0032*** −0.0020* −0.0032**
[−4.06] [−1.16] [−2.78] [−3.51] [−1.85] [−2.30]
Profitability −0.0006 −0.0003 −0.0006 −0.0046** −0.0051*** −0.0046**
[−0.41] [−0.29] [−0.32] [−2.51] [−2.75] [−2.30]
Sales Growth 0.0001 0.0001 0.0001 0.0003 0.0004 0.0003
[0.54] [0.88] [0.45] [0.77] [0.97] [0.70]
Log (Age) −0.0048 0.0292 −0.0048 0.0072 0.0486* 0.0072
[−0.26] [1.18] [−0.26] [0.37] [1.85] [0.31]
Log (Sales) −0.0048 −0.0045 −0.0048 0.0312** 0.0358*** 0.0312*
[−0.66] [−0.73] [−0.51] [2.22] [3.22] [1.80]
Industry FE No Yes No No Yes No
Province FE Yes No Yes Yes No Yes
Firm FE No No No No No No
Cluster Firm Firm and Province Firm and Industry Firm Firm and Province Firm and Industry
Observations 9999 9999 9999 10,035 10,035 10,035
This table presents panel regressions of determinants for Research Intensity (Alternative Measure 1) (specifications 1–3), measured as research expenses over
total sales, and Research Intensity (Alternative Measure 2) (specifications 4–6), measured as research expenses over total equity using all control variables as
in Tan et al. (2015). Variables are defined in Appendix A1. Specifications 1, 3, 4, and 6, and 2 and 5, present results controlling for Province and Firm Fixed
Effects, respectively. Standard errors are clustered at firm level for specifications 1 and 4, at both firm and province levels for specifications 2 and 5, and at
both firm and industry levels for specifications 3 and 6. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
22
Table A9
Robustness check for skewed distribution of research intensity.
(1) (2) (3) (4) (5)
Constant −9.6689*** −10.5008*** −9.7302*** −12.4651*** −13.0559***

[−8.39] [−8.06] [−8.42] [−9.35] [−9.68]
Lag RI Dummy 4.2657*** 4.0654*** 4.2502*** 4.2827*** 4.2688***
[52.60] [46.48] [50.80] [51.34] [49.33]
Post 0.5142*** 0.2940** 0.5067*** 0.3540** 0.3086**
[4.02] [2.30] [4.00] [2.20] [1.97]
Log (Total Salary) 0.3254*** 0.3719***
[4.42] [4.97]
PerStateOwn −0.2669 −0.1747
[−0.95] [−0.63]
PerStateOwn*Post 0.1693 0.1610
[0.60] [0.58]
% Independent Directors −0.0015 −0.0050
[−0.18] [−0.58]
Board Size −0.0162 −0.0274
[−0.78] [−1.32]
[−2.68] [−3.17]
[−0.00] [−0.19]
Log (Cash) −0.0341 0.0319 −0.0403 −0.0663 −0.0709
[−0.65] [0.52] [−0.76] [−1.19] [−1.26]
Leverage −0.0099*** −0.0032 −0.0086*** −0.0101*** −0.0088***
[−3.84] [−1.41] [−3.46] [−3.86] [−3.47]
Tangibility −0.0126*** −0.0065* −0.0129*** −0.0110*** −0.0112***
[−4.18] [−1.68] [−4.21] [−3.55] [−3.56]
Profitability −0.0217*** −0.0202*** −0.0188*** −0.0270*** −0.0256***
[−3.09] [−2.95] [−2.63] [−3.74] [−3.49]
Log(Sales) 0.1616*** 0.1271* 0.1820*** 0.1255** 0.1501**
[2.75] [1.87] [3.09] [2.11] [2.48]
SalesGrowth 0.0006 0.0009** 0.0005 0.0009** 0.0009**
[1.53] [2.23] [1.31] [2.32] [2.23]
Log(Age) −0.1073 0.0085 −0.1706** −0.1256 −0.2227**
[−1.29] [0.09] [−1.98] [−1.44] [−2.47]
Mkt-to-Book Ratio 0.0315*** 0.0159 0.0294*** 0.0330*** 0.0322***
[2.97] [1.33] [2.82] [3.08] [3.05]
Firm Size 0.2023*** 0.2082*** 0.1633** 0.2030*** 0.1623**
[2.75] [2.58] [2.21] [2.63] [2.09]
Industry FE No Yes No No No
Province FE No No Yes No Yes
Cluster Firm Firm Firm Firm Firm
Observations 10,043 9909 10,043 9909 9909
This table presents panel logit regressions for the determinants of Research Intensity Dummy, which equals 1 when Research Intensity > 0, and 0
otherwise. Variables are defined in Appendix Table A1. Specifications 1, 2, and 3 present regression results with Firm Characteristics, with Industry
Fixed Effects (Model 2), and with Province Fixed Effects (Model 3). Specifications 4 and 5 present regression results with all variables jointly, and with
and without Industry Fixed Effects, respectively. Standard errors are clustered at firm level. *, **, and *** denote statistical significance at the 10%,
5%, and 1% levels, respectively.
Table A10
Robustness check using Heckman's (1979) two-stage procedures.
(1) (2) (3) (4) (5) (6)
Constant −0.3167*** −0.2374*** −0.3911*** −0.3972*** −0.3816*** −0.3600***

[−5.17] [−3.94] [−3.43] [−4.36] [−4.57] [−5.93]
Lag RI 0.7347*** 0.7530*** 0.7596*** 0.7530*** 0.3557*** 0.7471***
[25.80] [26.39] [26.13] [25.60] [11.16] [26.14]
Post 0.0329*** 0.0377*** 0.0367*** 0.0275*** 0.0240*** 0.0359***
[4.53] [5.08] [4.94] [3.68] [3.94] [4.55]
Log (Total Salary) 0.0183*** 0.0260*** 0.0094**
[5.11] [4.65] [2.15]
23
% Independent Directors 0.0004 −0.0005 0.0001

[0.73] [−0.65] [0.24]
Board Size −0.0001 0.0005 0.0002
[−0.05] [0.36] [0.18]
Ownership Concentration −0.0007*** −0.0009 −0.0013***
[−3.07] [−1.46] [−5.06]
HHI Industry Index −0.0001 0.0020* −0.0002
[−0.56] [1.77] [−1.03]
Leverage −0.0000 −0.0002** −0.0002** −0.0002*
[−0.47] [−2.04] [−2.12] [−1.87]
Tangibility −0.0004** −0.0006*** −0.0006*** −0.0005***
[−2.15] [−4.32] [−4.23] [−3.66]
Sales Growth 0.0000 0.0000 0.0000 0.0000
[1.25] [0.50] [0.67] [1.21]
Log (Age) 0.0049 −0.0047 −0.0037 −0.0082
[0.89] [−0.88] [−0.72] [−1.48]
Mkt-to-Book Ratio 1.5322*** 1.9847*** 2.0664*** 2.0388***
[2.60] [3.41] [3.64] [3.41]
Firm Size 0.0182*** 0.0154*** 0.0167*** 0.0160***
[5.19] [4.65] [5.02] [3.85]
Province FE No Yes No No No Yes
Firm FE No No Yes No Yes No
Cluster Firm Firm Firm Firm Firm Firm
Observations 10,001 10,001 10,001 10,162 10,162 9871
This table presents panel regression results of Heckman's (1979) two-step procedures for the determinants of Research Intensity, the dependent
variable in our main model. The variables in the selection model are Change in Cash, ROA, and Change in Sales. Variables are defined in Appendix
Table A1. Specifications 1–3 present regression results with Firm Characteristics, and with Industry, Province, and Firm Fixed Effects, respectively.
Specifications 4 and 5 present regression results with Corporate Governance Characteristics and Firm Fixed Effects, respectively. Specification 6
presents regression results with all variables jointly and controlled for Province Fixed Effects. Standard errors are clustered at firm level for all
specifications. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Table A11
Robustness check using Heckman's (1979) two-stage procedures and Tan et al.'s (2015) control variables.
(1) (2) (3) (4)
Lag RI 0.7614*** 0.7367*** 0.7544*** 0.3650***

[26.06] [25.75] [26.33] [11.55]
Post 0.0359*** 0.0325*** 0.0372*** 0.0206***
[4.81] [4.44] [4.98] [3.00]
Leverage −0.0003*** −0.0002** −0.0003*** −0.0003*
[−3.87] [−2.05] [−3.54] [−1.68]
Tangibility −0.0006*** −0.0005*** −0.0007*** −0.0005*
[−4.79] [−2.82] [−4.81] [−1.80]
Profitability −0.0001 −0.0002 −0.0000 −0.0002
[−0.24] [−0.50] [−0.03] [−0.64]
Sales Growth 0.0000 0.0001* 0.0000 0.0000
[1.46] [1.93] [1.21] [0.86]
Log (Age) −0.0008 0.0075 −0.0024 0.0382***
[−0.16] [1.40] [−0.46] [3.07]
Log (Sales) 0.0038* 0.0046** 0.0034 0.0050
[1.81] [2.07] [1.56] [1.15]
Industry FE No Yes No No
Province FE No No Yes No
Firm FE No No No Yes
Cluster Firm Firm Firm Firm
Observations 10,084 10,084 10,084 10,084
This table presents panel regression results for Heckman's (1979) two-stage procedures for the determinants of Research Intensity using all control
variables as in Tan et al. (2015). The dependent variable in our main model is Research Intensity. The variables in the selection model are Change in
Cash, ROA, and Change in Sales. Variables are defined in Appendix Table A1. Specification 1 presents results with all control variables. Specifications
2–4 present results controlling for Industry, Province, and Firm Fixed Effects, respectively. Standard errors are clustered at firm level for all speci-
fications. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
24
Table A12
Robustness check for causality issue of managerial incentives.
(1) (2) (3) (4)
Total # Share Total # Chair Total Value Share Total Value Chair
Constant −105.4937 −88.8067 −230.5556 −302.7284

[−1.10] [−0.96] [−1.14] [−1.61]
Lag RI 1.9091 1.5033 8.7464 8.5312
[0.81] [0.77] [1.22] [1.23]
Post 12.1833*** 9.3523*** 24.1270*** 18.4716***
[9.68] [8.91] [8.82] [7.76]
Log (Cash) −1.6634* −1.2193* −2.5278* −1.6724
[−1.92] [−1.73] [−1.79] [−1.57]
Leverage 0.0198 0.0090 0.1231 0.0974
[0.55] [0.29] [1.36] [1.16]
Tangibility −0.2365*** −0.1814** −0.4288** −0.3203**
[−2.74] [−2.37] [−2.50] [−2.08]
Profitability −0.1110 −0.1031 0.3611* 0.3269*
[−1.11] [−1.14] [1.87] [1.87]
Log(Sales) 2.5334* 2.1978* 2.4736 2.0534
[1.84] [1.81] [0.81] [0.74]
SalesGrowth −0.0059 −0.0094* 0.0150 −0.0037
[−0.89] [−1.66] [0.72] [−0.23]
Log(Age) −20.6653*** −16.1456*** −48.7218*** −37.7272***
[−7.03] [−6.01] [−5.61] [−4.71]
Mkt-to-Book Ratio −0.0532 −0.0182 0.9393 0.9247
[−0.64] [−0.26] [1.52] [1.54]
Firm Size 8.8467** 7.2527** 20.3674*** 16.5835**
[2.29] [1.99] [2.66] [2.30]
FE Province Province Province Province
Observations 9321 9119 9287 9087
Adjusted R-squared 0.070 0.059 0.060 0.049
This table presents panel regressions of the impact of past Research Intensity on Compensation Incentives. Variables are defined in Appendix A1.
Specifications 1–4 present regression results with Firm Characteristics on different Compensation Measures as dependent variable: Total # Shares
Owned by Board (Model 1), Total # Shares Owned by Chair (Model 2), Total Value Shares Owned by Board (Model 3), and Total Value Shares Owned by
Chair (Model 4) with Province Fixed Effects. Standard errors are clustered at firm level for all models. *, **, and *** denote statistical significance at
the 10%, 5%, and 1% levels, respectively.
Table A13
Multivariate analysis of research intensity using top 3 executives' pay.
(1) (2) (3) (4) (5) (6)
Constant −0.562318*** −0.473726*** −0.691486*** −0.317364*** −0.540088*** −0.526854***

[−6.30] [−5.65] [−4.84] [−3.90] [−5.33] [−6.05]
Lag RI 0.733612*** 0.751554*** 0.365554*** 0.356331*** 0.747309*** 0.754202***
[25.69] [26.31] [11.67] [11.16] [16.37] [26.56]
Post 0.028498*** 0.032514*** 0.020658*** 0.023705*** 0.034814*** 0.031678**
[3.76] [4.19] [2.92] [3.84] [4.83] [2.53]
Log (Top 3 Executives' Pay) 0.011214** 0.015136*** 0.012606** 0.026391*** 0.012837*** 0.009674*
[2.41] [3.17] [1.98] [5.15] [2.69] [1.78]
[−0.33]
[0.11]
% Independent Directors −0.000505 0.000065 0.000142
[−0.63] [0.10] [0.25]
Board Size 0.001010 0.000571 0.000951
[0.70] [0.46] [0.72]
Ownership Concentration −0.000866 −0.001279*** −0.001080***
[−1.38] [−3.85] [−4.68]
HHI Industry Index 0.001978* −0.000218 −0.000142
[1.74] [−0.45] [−0.69]
Log (Cash) −0.000520 −0.005509* 0.001122 −0.005127 −0.004370
[−0.18] [−1.90] [0.32] [−1.45] [−1.26]
25
Leverage −0.000115 −0.000281*** −0.000255 −0.000270*** −0.000290***

[−1.17] [−3.03] [−1.48] [−2.78] [−3.09]
Tangibility −0.000387** −0.000633*** −0.000216 −0.000613** −0.000546***
[−2.02] [−4.31] [−0.79] [−2.26] [−3.07]
Profitability −0.000964*** −0.000829** −0.000840** −0.000823 −0.000907**
[−2.65] [−2.11] [−2.15] [−1.24] [−2.28]
Log(Sales) −0.006365* −0.001780 −0.008081 −0.000337 −0.000467
[−1.80] [−0.56] [−1.41] [−0.07] [−0.15]
SalesGrowth 0.000054* 0.000029 0.000022 0.000044 0.000047
[1.89] [1.00] [0.91] [1.21] [1.47]
Log(Age) 0.003964 −0.006298 0.021487* −0.009344 −0.007608
[0.72] [−1.17] [1.65] [−1.37] [−1.15]
Mkt-to-Book Ratio 0.001223** 0.001705*** −0.000083 0.001571*** 0.001673***
[2.12] [3.13] [−0.16] [3.09] [3.56]
Firm Size 0.023383*** 0.019475*** 0.031463*** 0.022867*** 0.024545***
[4.90] [4.38] [5.41] [3.69] [4.94]
Observations 9917 9917 9917 10,133 9814 9814
This table presents panel regressions of the determinants of Research Intensity. Variables are defined in Appendix A1. Specifications 1–3 present
regression results with Firm Characteristics, and with Industry, Province, and Firm Fixed Effects, respectively. Specifications 4 and 5 present regression
results with Corporate Governance Characteristics without controls for State Ownership, and with Firm Fixed Effects and Province Fixed Effects, re-
spectively. Specification 6 presents regression results with all variables jointly. Standard errors are clustered at firm level for Models 1–3, at both
firm and industry levels for Model 5, and at both firm and province levels for Models 4 and 6. *, **, and *** denote statistical significance at the
Table A14
Impact of performance-based compensation on research intensity before and after policy change focusing on top executives.
(1) (1) (2) (2)
Before 2008 After 2008 Before 2008 After 2008
Log (Total Executive Share) Log (Total Executive Share) Log (Total Mgmt Share) Log (Total Mgmt Share)
Constant −0.2032 −0.1303 −0.3815* −0.1349

[−0.83] [−1.34] [−1.87] [−1.62]
Lag RI 0.1666*** 0.8683*** 0.1587*** 0.8804***
[3.10] [29.96] [3.35] [37.05]
Log (Total 0.0044 [1.10] 0.0032** [2.32]
Executive Share)
Log (Total Mgmt Share) 0.0049 [1.64] 0.0030*** [2.69]
Log (Cash) 0.0052 −0.0016 0.0069 −0.0018
[0.66] [−0.46] [1.09] [−0.59]
Leverage −0.0000 −0.0002 0.0000 −0.0002*
[−0.01] [−1.14] [0.20] [−1.91]
Tangibility −0.0013*** −0.0003 −0.0009*** −0.0004***
[−3.02] [−1.58] [−2.94] [−2.64]
Profitability −0.0023** −0.0000 −0.0020** −0.0003
[−2.09] [−0.03] [−2.14] [−0.65]
Log(Sales) −0.0067 −0.0009 0.0010 −0.0005
[−0.70] [−0.22] [0.13] [−0.16]
SalesGrowth 0.0001 0.0000 0.0003 −0.0000
[1.05] [0.73] [1.28] [−0.19]
Log(Age) −0.0131 0.0027 −0.0055 0.0026
[−0.78] [0.40] [−0.41] [0.44]
Mkt-to-Book Ratio 0.0036 0.0028** 0.0030* 0.0023***
[1.43] [2.31] [1.92] [2.73]
Firm Size 0.0120 0.0067 0.0095 0.0072
[0.86] [1.34] [0.97] [1.58]
FE Province Province Province Province
Observations 1119 3871 1452 4969
Adjusted R-squared 0.086 0.726 0.074 0.733
This table presents a panel regression of the determinants of Incentives of Research Intensity. Variables are as defined in the Appendix A1. Specifications 1
and 2 present regression results with Firm Characteristics, and with different Compensation Measures: Log (Total Executive Shares) (1) and Log (Total
Management Shares) (2), respectively, with Province Fixed Effects. For each specification, we separate the data into two periods: Before and after the 2008
government policy implementation. Standard errors are clustered at firm level. *, **, and *** denote statistical significance at the 10%, 5%, and 1%
levels, respectively.
26
F. Zhan, et al.
Table A15
The impact of the 12th five-year plan on research intensity—DiD regression.
(1a) (1b) (2a) (2b) (3a) (3b) (4a) (4b) (5a) (5b) (6a) (6b)
⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎
Constant −3.4300 −3.8722 −2.8666 −3.1837 −17.9329 −3.9443 −5.3494 −3.9405 −1.7515 −2.1004 −2.0955 −2.1525⁎⁎⁎
[−5.77] [−7.87] [−5.47] [−7.05] [−18.79] [−7.77] [−7.91] [−7.77] [−2.82] [−9.98] [−4.55] [−8.76]
Delta Lag RI 0.7234⁎⁎⁎ 0.7682⁎⁎⁎ 0.8478⁎⁎⁎ 0.8819⁎⁎⁎ 0.7256⁎⁎⁎ 0.7715⁎⁎⁎ 0.7269⁎⁎⁎ 0.7742⁎⁎⁎ 0.8690⁎⁎⁎ 0.8945⁎⁎⁎ 0.8951⁎⁎⁎ 0.9107⁎⁎⁎
[25.08] [31.13] [37.46] [50.02] [24.72] [30.98] [25.06] [31.45] [52.40] [64.30] [60.30] [72.61]
Post 2.3301⁎⁎⁎ 2.3680⁎⁎⁎ 1.8426⁎⁎⁎ 2.1781⁎⁎⁎ 2.4793⁎⁎⁎ 2.6343⁎⁎⁎ 2.4727⁎⁎⁎ 2.6031⁎⁎⁎ 1.3653⁎⁎⁎ 2.0400⁎⁎⁎ 1.1741⁎⁎⁎ 1.4940⁎⁎⁎
[4.96] [3.64] [5.10] [4.68] [5.15] [4.05] [5.15] [4.00] [7.28] [7.65] [6.60] [7.10]
Delta Leverage 0.0010 −0.0003 −0.0085⁎⁎⁎ −0.0085⁎⁎⁎ 0.0015 −0.0006 0.0022 0.0002 0.0050⁎⁎⁎ 0.0035⁎ −0.0079⁎⁎⁎ −0.0091⁎⁎⁎
[0.15] [−0.05] [−2.71] [−3.15] [0.21] [−0.08] [0.30] [0.04] [2.84] [1.91] [−3.17] [−4.12]
Delta Tangibility −0.0328⁎⁎⁎ −0.0278⁎⁎⁎ −0.0126⁎⁎ −0.0037 −0.0338⁎⁎⁎ −0.0266⁎⁎⁎ −0.0384⁎⁎⁎ −0.0300⁎⁎⁎ −0.0312⁎⁎⁎ −0.0176⁎⁎⁎ −0.0261⁎⁎⁎ −0.0113⁎⁎⁎
[−3.80] [−3.94] [−2.00] [−0.72] [−3.74] [−3.63] [−4.16] [−3.91] [−6.58] [−4.64] [−6.00] [−3.52]
Delta Profitability 0.0029 0.0032 0.0167 0.0201⁎⁎ 0.0030 0.0033 0.0042 0.0046 −0.0285⁎⁎⁎ −0.0296⁎⁎⁎ −0.0348⁎⁎⁎ −0.0360⁎⁎⁎
[0.23] [0.27] [1.53] [1.98] [0.23] [0.27] [0.33] [0.38] [−6.28] [−6.90] [−3.92] [−4.06]
27
Delta Log (Sales) −0.6599⁎⁎⁎ −0.5938⁎⁎⁎ −0.4192⁎⁎⁎ −0.4186⁎⁎⁎ −0.6384⁎⁎⁎ −0.5970⁎⁎⁎ −0.6545⁎⁎⁎ −0.5922⁎⁎⁎ −0.1136⁎ −0.1256⁎⁎ −0.0198 −0.0843⁎⁎
[−6.96] [−6.95] [−5.86] [−6.35] [−6.48] [−6.54] [−6.61] [−6.54] [−1.93] [−2.31] [−0.44] [−2.06]
Delta Sales Growth 0.0025 0.0040⁎⁎ 0.0011 0.0015⁎ 0.0016 0.0030⁎ 0.0015 0.0029⁎ −0.0005 −0.0005 0.0011 0.0013⁎⁎
[1.40] [2.26] [1.31] [1.68] [0.97] [1.87] [0.94] [1.81] [−0.82] [−0.79] [1.51] [2.00]
Delta Log (Age) 0.1067 0.4304⁎⁎⁎ −0.0425 0.0699 0.0886 0.4551⁎⁎⁎ 0.0456 0.4383⁎⁎⁎ −0.2626 −0.8146⁎⁎⁎ −0.8947⁎⁎⁎ −1.1654⁎⁎⁎
[0.56] [3.38] [−0.29] [0.70] [0.46] [3.51] [0.24] [3.36] [−1.48] [−4.30] [−4.03] [−5.51]
Industry FE Yes No Yes No Yes No Yes No Yes No Yes No
Firm FE No Yes No Yes No Yes No Yes No Yes No Yes
Year FE No Yes No Yes No Yes No Yes No Yes No Yes
Cluster Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm Firm
Observations 7652 7652 4212 4212 7304 7304 7311 7311 6452 6452 6506 6506
Adjusted R2 0.686 0.681 0.801 0.799 0.696 0.690 0.697 0.691 0.846 0.847 0.845 0.844
This table presents the difference-in-differences (DiD) regression results for the determinants of U.S. and Chinese Research Intensity for the matched samples using all control variables, as in Tan et al.
(2015). Variables are defined in Appendix Table A1. Specification 1 gives the results for Ritter's (1991) matching approach; specification 2 for Spiess and Affleck-Graves' (1995) approach; specification 3
for Michaely et al.'s (1995) approach; specification 4 for the same industry and market-to-book approach; specification 5 for nearest neighbor matching with absolute values; and specification 6 for nearest
neighbor matching with mean adjusted values. Variant “a” controls for Industry Fixed Effects, variant “b” controls for Firm and Year Fixed Effects. Standard errors are clustered at firm level for all
specifications, in line with Tan et al. (2015). *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Table A16
Description of the Chinese-U.S. company matching procedure.
Matching Procedure Description
Variation of Matching U.S. with Chinese companies first requires industry classification (e.g., two-digit SIC code). Next, the U.S. firm with the
Ritter (1991) closest market value is chosen as the matched company. If no matching U.S. company within the two-digit SIC code is available, the
one-digit SIC code with the closest market value is used instead.
Note: In Ritter's (1991) original version, three-digit SIC codes were used and companies were ranked by market value. If no match
was available, another firm was chosen by two-digit SIC code.
Spiess and Affleck-Graves Matching U.S. with Chinese companies first requires industry classification (e.g., two-digit SIC code). Next, the U.S. firm with the
(1995) closest market value that is smaller than that of the Chinese company is chosen as the matched company. This is because we expect
Chinese companies to grow faster than their U.S. matches.
Michaely et al. (1995) Matching U.S. with Chinese companies first requires industry classification (e.g., two-digit SIC code). Next, the U.S. firm with the
closest market value is chosen as the matched company.
Same Industry and Market- Matching U.S. with Chinese companies first requires industry classification (e.g., two-digit SIC code). Next, the U.S. firm with the
to-Book closest market-to-book value is chosen as the matched company.
This table summarizes the matching algorithms for the Chinese and U.S. companies, and denotes the authors of the studies who were the first to
apply the algorithms. For any case where we deviate from the original algorithm, we also include a short description.
Table A17
Industry match between Chinese industry C-Code and U.S. two-digit SIC code.
NNINDCD Industry C: Description SIC Code Group Description
A01 Agriculture 01: Agricultural Production Crops

B11 Ancillary Activities for Mining 13: Oil and Gas Extraction
C36 Automobile Manufacturing 35: Industrial and Commercial Machinery and Computer Equipment
R86 Broadcast, Television, Film and Television Recording Industry 78: Motion Pictures
E47 Building Construction 65: Real Estate
L72 Business Service 87: Engineering, Accounting, Research, Management, and Related Services
C28 Chemical Fiber Manufacturing 28: Chemicals and Allied Products
E48 Civil Engineering Construction 87: Engineering, Accounting, Research, Management, and Related Services
C42 Comprehensive Utilization Industry of Waste Resources 10: Metal Mining
C39 Computer, Communication and Other Electronic Device 35: Industrial and Commercial Machinery and Computer Equipment
Manufacturing
S90 Conglomerates 39: Miscellaneous Manufacturing Industries
E49 Construction and Installation 65: Real Estate
N77 Ecological Preservation and Environmental Treatment 89: Miscellaneous Services
Industry
P82 Education 82: Educational Services
C38 Electric Machines and Apparatuses Manufacturing 36: Electronic and Other Electrical Equipment and Components, Except Computer
Equipment
C13 Farm Products Processing 20: Food and Related Products
A05 Farming, Forestry, Animal Husbandry, and Fishery 08: Forestry
A04 Fishery 09: Fishing, Hunting, and Trapping
C14 Food Manufacturing 20: Food and Related Products
C21 Furniture Manufacturing 25: Furniture and Fixtures
C34 General Equipment Manufacturing 35: Industrial and Commercial Machinery and Computer Equipment
A03 Graziery 02: Agriculture Production Livestock and Animal Specialties
G54 Highway Transport 42: Motor Freight Transportation and Warehousing
C40 Instrument and Meter Manufacturing 38: Measuring, Analyzing, and Controlling Instruments; Photographic, Medical and
Optical Goods; Watches and Clocks
I64 Internet and Related Services 73: Business Services
C33 Metal Products 34: Fabricated Metal Products, Except Machinery and Transportation Equipment
B09 Mining and Dressing of Nonferrous Metals 10: Metal Mining
R85 News and Publishing Industry 27: Printing, Publishing, and Allied Industries
C30 Non-Metallic Mineral Products 32: Stone, Clay, Glass, and Concrete Products
J69 Other Finance 67: Holding and Other Investment Offices
C41 Other Manufacturing 39: Miscellaneous Manufacturing Industries
B07 Petroleum and Gas Extraction 29: Petroleum Refining and Related Industries
C25 Petroleum Processing, Coking and Nuclear Fuel Processing 29: Petroleum Refining and Related Industries
C27 Pharmaceutical Manufacturing 28: Chemicals and Allied Products
C23 Printing and Reproduction of Recorded Media 27: Printing, Publishing, and Allied Industries
D44 Production and Supply of Electric Power and Thermal Power 49: Electric, Gas, and Sanitary Services
D46 Production and Supply of Water 49: Electric, Gas, and Sanitary Services
N78 Public Facilities Management 70: Hotels, Rooming Houses, Camps, and Other Lodging Places
C37 Railway, Shipbuilding, Aerospace and Other Transportation 37: Transportation Equipment
Equipment Manufacturing
C26 Raw Chemical Materials and Chemical Products 28: Chemicals and Allied Products
K70 Real Estate 65: Real Estate
28
M73 Research and Experimental Development 87: Engineering, Accounting, Research, Management, and Related Services
F52 Retail Trade 28: Chemicals and Allied Products
C29 Rubber and Plastic Product Industry 30: Rubber and Miscellaneous Plastics Products
Q83 Sanitation 49: Electric, Gas, and Sanitary Services
C31 Smelting and Pressing of Ferrous Metals 33: Primary Metal Industries
C32 Smelting and Pressing of Nonferrous Metals 33: Primary Metal Industries
I65 Software and IT services 73: Business Services
C35 Special Equipment Manufacturing 35: Industrial and Commercial Machinery and Computer Equipment
I63 Telecommunications, Broadcast, Television, and Satellite 48: Communications
Transmission Services
C17 Textile 22: Textile Mill Products
C18 Textiles, Garments and Apparel industry 23: Apparel and Other Finished Products Made from Fabrics and Similar Materials
C20 Timber Processing, Timber, Bamboo, Cane, Palm Fiber and 24: Lumber and Wood Products, Except Furniture
Straw Products
G59 Warehousing 42: Motor Freight Transportation and Warehousing
G55 Water Transportation 44: Water Transportation
F51 Wholesale 50: Wholesale Trade-Durable Goods
C15 Wine, Drinks and Refined Tea Manufacturing 20: Food and Related Products
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Emerging Markets Review 42 (2020) 100675

Contents lists available at ScienceDirect

Emerging Markets Review

China: From imitator to innovator?☆

ARTICLE INFO ABSTRACT

2.1. Policy changes and R&D spending of Chinese firms

risky R&D because of their fear of termination in the event of failure.

3. Data-gathering process and dataset

Variable name # Mean Std 5% Quantile Median 95% Quantile

Research Intensity (RI) 10,448 0.100 0.378 0.000 0.000 0.690

(1) Research Intensity (RI) 1.00

(continued on next page)

5.1. Determinants of research intensity

Panel A: Research Intensity Before and After Policy Implementation

(1) (2) (3) (4) (5) (6)

Constant −0.4875*** −0.3867*** −0.6138*** −0.3972*** −0.5372*** −0.5272***

5.2.1. Fraudster companies

5.2.2. Turnover companies

5.2.3. Recent global financial crisis

5.3. Robustness checks

5.4. Comparison of Chinese and U.S. research intensity

Variable name Definition

(1) (2) (3) (4) (5)

Constant −0.4877*** −0.3894*** −0.6142*** −0.5566*** −0.5401***

Tangibility −0.0004** −0.0007*** −0.0003 −0.0006** −0.0005***

(1) (2) (3) (4) (5)

Constant −0.4866*** −0.3834*** −0.6159*** −0.5196*** −0.5203***

SalesGrowth 0.0000* 0.0000 0.0000 0.0000 0.0001

(1) (2) (3) (4) (5) (6)

Constant −0.6566*** −1.3014*** −1.0739*** −0.9274*** −1.4101*** −1.5095***

(1) (2) (3) (4) (5) (6)

Constant −0.3085*** −0.2433*** −0.3579*** −0.2317*** −0.3310*** −0.3226***

(1) (2) (3) (4) (5)

Constant 0.0428 −0.0632 −0.1137 −0.1113*** −0.0632

(1) (2) (3) (4) (5) (6)

Alternative Measure 1 Alternative Measure 2

Constant 0.1551 0.0086 0.1551 −0.6502** −0.6168*** −0.6502*

(1) (2) (3) (4) (5)

Constant −9.6689*** −10.5008*** −9.7302*** −12.4651*** −13.0559***

(1) (2) (3) (4) (5) (6)

Constant −0.3167*** −0.2374*** −0.3911*** −0.3972*** −0.3816*** −0.3600***

% Independent Directors 0.0004 −0.0005 0.0001

(1) (2) (3) (4)

Lag RI 0.7614*** 0.7367*** 0.7544*** 0.3650***

(1) (2) (3) (4)

Constant −105.4937 −88.8067 −230.5556 −302.7284

(1) (2) (3) (4) (5) (6)

Constant −0.562318*** −0.473726*** −0.691486*** −0.317364*** −0.540088*** −0.526854***

Leverage −0.000115 −0.000281*** −0.000255 −0.000270*** −0.000290***

(1) (1) (2) (2)

Before 2008 After 2008 Before 2008 After 2008

Constant −0.2032 −0.1303 −0.3815* −0.1349

Matching Procedure Description

NNINDCD Industry C: Description SIC Code Group Description

A01 Agriculture 01: Agricultural Production Crops

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Constant −0.4875* −0.3867* −0.6138* −0.3972* −0.5372* −0.5272*

Constant −0.4877* −0.3894* −0.6142* −0.5566* −0.5401***

Tangibility −0.0004 −0.0007* −0.0003 −0.0006 −0.0005*

Constant −0.4866* −0.3834* −0.6159* −0.5196* −0.5203***

Constant −0.6566* −1.3014* −1.0739* −0.9274* −1.4101* −1.5095*

Constant −0.3085* −0.2433* −0.3579* −0.2317* −0.3310* −0.3226*

Constant 0.1551 0.0086 0.1551 −0.6502 −0.6168* −0.6502*

Constant −9.6689* −10.5008* −9.7302* −12.4651* −13.0559***

Constant −0.3167* −0.2374* −0.3911* −0.3972* −0.3816* −0.3600*

Lag RI 0.7614* 0.7367* 0.7544* 0.3650*

Constant −0.562318* −0.473726* −0.691486* −0.317364* −0.540088* −0.526854*

Leverage −0.000115 −0.000281* −0.000255 −0.000270* −0.000290***