Industry Association Networks, Innovations, and Firm Performance in
Chinese Small and Medium-Sized Enterprises

Peng-hua Qiao, Xiao-feng Ju, Hung-Gay Fung

PII: S1043-951X(14)00037-6
DOI: doi: 10.1016/j.chieco.2014.04.011
Reference: CHIECO 715

To appear in: China Economic Review

Received date: 12 August 2013

Revised date: 28 April 2014
Accepted date: 28 April 2014

Please cite this article as: Qiao, P.-, Ju, X.- & Fung, H.-G., Industry Association Net-
works, Innovations, and Firm Performance in Chinese Small and Medium-Sized Enter-
prises, China Economic Review (2014), doi: 10.1016/j.chieco.2014.04.011

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 ACCEPTED MANUSCRIPT

Industry Association Networks, Innovations, and Firm Performance in Chinese Small and

Medium-Sized Enterprises

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Peng-hua Qiao, Xiao-feng Ju, Hung-Gay Fung 

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
Peng-hua Qiao, PhD student and lecturer, School of Management, Harbin Institute of Technology and School of
Business and Economics, Qiqihar University, Qiqihar, China. Email: oldbridge1221@126.com; Xiao-feng Ju,
Professor, School of Management, Harbin Institute of Technology, Harbin, China. Email: Juxf@hit.edu.cn; and
Hung-Gay Fung, Curators’ Professor of Finance and Dr. Y.S. Tsiang Chaired Professor, College of Business
Administration, University of Missouri-St. Louis, St. Louis, USA. Email: FungH@msx.umsl.edu.

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Industry Association Networks, Innovations, and Firm Performance in Chinese Small and

Medium-Sized Enterprises

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Abstract

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This study uses panel data analysis to examine the effects of membership in industry association

networks on innovation and firm performance in Chinese small and medium-sized enterprises

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(SMEs) listed on the Shenzhen Stock Exchange Small and Medium-size Enterprises Board from
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2007 to 2011. There are several interesting findings. First, research and development (R&D) and

technology staff have a positive and significant effect on innovation at SMEs. Second,
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participation in industry association networks (defined as comprising business association

networks and technology association networks) can improve firm innovation at Chinese SMEs.
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Third, innovation is found to have a positive effect on firm performance at SMEs. Finally,

membership in industry association networks can improve firm efficiency and increase
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non-operating income but at the expense of higher management costs at SMEs. Our study has

important policy implications for policymakers and SMEs in China.

Key words: firm performance, industry association networks, innovations, small and

medium-sized enterprises

JEL codes: G28, G31, G32

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1. Introduction

Since its introduction of economic reforms in late 1978, China has experienced rapid

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economic growth, and in 2011 its economy became the world’s second-largest after the US.1

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There is an ongoing debate regarding what underlying factors (productivity or factor

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accumulation) are behind China’s rapid growth (Wang & Yao, 2003). Despite China’s size and

position in the world, Chinese GDP per capita is still low and ranks ninetieth in the world.

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China’s economy is not considered to have joined the ranks of advanced economies, which are
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based more on knowledge-intensive sectors to generate greater innovation, growth, and

employment, whereas Chinese economic development still relies on manufacturing-based

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industry. In both knowledge-based and manufacturing-based economies, research and

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development (R&D) investment is essential for innovation, which will lead to higher growth in
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the economy (García-Manjón & Romero-Merino, 2012). One of the objectives of this study is to
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investigate how Chinese firms can achieve greater innovation.

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Figure 1 shows that in the global market, R&D dollar investment in China ranks third

after the United States and Japan, and in China R&D investment as a share of GDP was only

1.76% in 2010, which is far lower than in the Western developed countries, such as Japan, which

that same year had the highest share, 3.26%, followed by the United States, where it was 2.8%.2

It is clear that China must increase its R&D investment to remain globally competitive.

1
www.stats.gov.cn.
2
R&D expenditure consists of the total expenditure (current and capital) by all resident companies, research institutes,
and university and government laboratories. It excludes R&D expenditures financed by domestic firms but performed
abroad. R&D/GDP is a share of R&D per GDP.

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[Insert Figure1 here]

How can the output of R&D be measured? Patents, the output of R&D efforts, are

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generally recognized as reflecting the level of firms’ innovation (Akcomak & Ter Weel, 2009).

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Emerging markets, such as Brazil, Russia, India, China, and South Africa (BRICS) have become

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important contributors to the global economy over time. How do innovative activities in China

compare with those in industrialized countries and other emerging markets? Figure 2 shows that

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in 2011 the volume of patents applications was greater in China than in Japan and the United
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States, an indication of the speed at which patent applications in China have grown. This

contrasts sharply with the other BRICS, where the number of patent applications has been small.
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The main question here is: To what extent is R&D investment critical in promoting innovation in
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China and what other factors contribute to the performance of Chinese SMEs?
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[Insert Figure 2 here]

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The Chinese government has implemented a series of national plans and supporting
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measures on several fronts to motivate Chinese enterprises to improve on innovation. First, on

February 9, 2006, the Chinese government promulgated a national program for medium- and

long-term scientific and technological development (2006-2020) and put forth a policy for the

development of science and technology that says, “China should rely on independent innovation

and drive a productivity quality leap, then promote sustainable development of the economy and

society.”3

3
www.most.gov.cn/kjgh/kjghzcq/.

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Second, on October 15, 2007, the 17th National People’s Congress (NPC) of the Chinese

Communist Party clearly expressed its priority on improving the quality of higher education,

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building strength in human resources, and building an innovative country as a national

development strategy.

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Third, on September 23, 2012, the Chinese government issued a policy guideline that

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states that it intends to go further to reform the scientific and technological system and speed up

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the construction of a national system of innovation. In January 2013, China’s State Council
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issued the twelfth five-year plan for building national ability to engage in independent innovation,

which stated that the government will increase fiscal and financial support for innovation and
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expand the innovation fund for SMEs with discounted loans, R&D funding support, government
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subsidies, and other means of support because SMEs are the engine of economic growth in
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China.4 In light of the importance of innovation and R&D at SMEs, this study examines some
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factors that promote innovation, which, in turn, may affect firms’ financial performance.
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In China, SMEs have been responsible for 66% of patent applications, 74% of

technological innovation, and 82% of new products. These results show that SMEs play a large

role in the country’s innovations and economic growth. 5 Moreover, Chinese SMEs have

experienced significant growth in terms of number and size (Fung, Liu, & Yau, 2007). In 1999,

according to the Chinese Economic and Trade Committee, more than 10 million SMEs were

officially registered, contrasting to the small number of SMEs prior to the economic reforms (Wu

4
www.chinanews.com/gn/2013/05-29/4871462.shtml.
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China Economic Weekly, July 15, www.ceweekly.cn.

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& Leung, 2005). Currently, SMEs contribute more than 60% of the country’s GDP, 50% of tax

revenues, 70% of import and export trade, and 80% of urban employment (Zhu, Wittmann, &

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Peng, 2012).

This study has several objectives and contributes to the literature in the several ways.

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First, we use data on Chinese SMEs from 2007 to 2011 to examine the effects of R&D and

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technical staff on the innovation at those enterprises. In this way, we can establish the

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relationship of R&D investments to innovation as output for SMEs, which is measured in terms
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of patents applications. There is limited research to demonstrate the relationship, particularly for

SMEs in China. This study is meant to fill this gap.

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Second, given that SMEs have limited resources (technical staff and financial resources) and
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smaller than large enterprises, it is important to know what factors can help SMEs become more
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innovative. We argue that involvement in industry association networks can help them improve
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firm innovation, by drawing on networks for missing resources. The rationale is, in fact, similar to
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the open innovation models that direct enterprises to draw on both external and internal ideas in

discovering and developing opportunities for innovation (Chesbrough et al., 2006; Chesbrough,

2003). Van de Vrande et al. (2009), in a study on the use of open innovation practices at SMEs,

highlight the importance for innovation of inter-organizational networking between employees at

different firms. SMEs are expected to search for and access external resources through various

relationships and networks more effectively through the CEO and his/her team (Hite & Hesterly,

2001). It stands to reason that the leaders (chairperson or CEO) of SMEs can expand external

networking by joining industry association networks and that doing so will promote innovation.

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The Chinese government has realized the importance of membership in industry association

networks for the growth of SMEs. At the third plenary meeting of the first session of the twelfth

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National People’s Congress in 2013, the development of these industry association networks was

highly encouraged. 6 Table 1 presents the descriptive statistic for the industry association

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networks of firms by year according to the data in this study. Among the 1,905 firms, 693 (36.38

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percent) of them have business association networks. The number of firms with business

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association networks dropped to 34.86% in 2008 from 36.04% in 2007, and then increased
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steadily to 37.31% in 2011 from 35.82% in 2009. The results also indicate that there are 895

(46.98 percent) firms with technology association networks. The percentage of these firms
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steadily increased to 50.09 percent in 2011 from 43.65 percent in 2007. On average, it seems
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clear that the SMEs in China are heavily involved in business association networks and
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technology networks. In another study, Yu, Shen, and Zhou (2013) conducted a survey in Jiangsu,
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Zhejiang, and Shanghai, documenting that 60.6% of enterprises believe that industry association
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networks can help them develop an industrial technology innovation platform, 70.9% believe

that industry association networks can improve their chances of success in patent applications

and in protecting intellectual property rights, and 82.4% believe that industry association

networks can guide enterprises in developing new products and new projects.

[Insert Table 1 here]

6
http://news.xinhuanet.com/english/china/2013-03/10/c_132222423.htm

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As SMEs in China have invested relatively less in R&D than larger firms, they generally

face more uncertainty in terms of financial resources and barriers in technical know-how to

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innovation. Membership in multiple industry associations by the CEO/chair can compensate for

these disadvantages, enhancing innovation by increasing the firm’s exposure to different ideas and

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different sources of information through relationships with other members (Diez, 2002). At the

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same time, through these business networks, SMEs can attract more technologically competent

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partners and obtain current market information, including information about technical resources
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and changes in market technologies that can help expand their innovation capacity (Rindfleisch &

Moorman, 2001).
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Third, we examine the effect of innovation on firm financial performance at SMEs, which is
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measured by Tobin’s q.7 Prior studies, such as Fang and Ge (2012), Guan et al. (2009), and Hull
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and Rothenberg (2008), have suggested that innovation is positively related to performance and
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is essential to survival. Terziovski (2010) argued that SMEs need to be innovative within the
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resource-based framework to continue to survive and maintain profitability. It is thus important

for us to examine how financial performance at Chinese SMEs is affected by innovation.

Finally, we try to understand better the specific mechanism by which industrial association

networks affect firm behavior, given that they can enhance firm value, as shown by Tobin’s q. As

a social group, industry associations can maintain the legitimate rights and interests of their

members and boost members’ development. As a bridge between the government and enterprises,

industry association networks can enable enterprises to participate in negotiations with the

7
On the development of the Chinese patent law and innovation process, see Cheung and Lin (2004).

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government and provide inputs to the government in formulating and implementing industrial

policy. Specifically, we investigate how industrial business networks affect the firm’s cost and

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efficiency measures, extending results by Qiao, Fung, and Ju (2013), who only show that

participation in business and technology associations increase firms’ market value.

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The rest of the paper is organized as follows. We present the literature review and develop

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hypotheses for analysis in Section 2. Section 3 presents the methodology and data sources. We

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analyze and discuss the empirical results in Section 4. The final section concludes.
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2. Hypothesis development and literature review

Innovation is the result of a successful process that involves interaction and exchange of
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knowledge and a combination of intangible forms of capital, especially social capital (Landry,

Amara, & Lamari, 2002). The dominant view in the literature is that networks and the social
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capital embedded in these relationships are positively associated with innovativeness as well as

performance of SMEs (Van Wijk, Jansen, & Lyles, 2008). Social capital is an asset that provides
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firms with opportunities to access information, knowledge, and resources in the social networks

(Maurer & Ebers, 2006). External networking is an important dimension that is consistently

associated with open innovation (Chesbrough, Vanhaverbeke, & West, 2006; Chesbrough, 2003).

It includes all activities entailed in acquiring and maintaining connections with external sources

of social capital, including individuals and organizations (Van de Vrande et al., 2009). Because

of their limited internal resources, SMEs are expected to search for and access external resources

through various relationships and networks, primarily through the social capital of their core

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personnel: generally, the CEO and his/her team (Hite & Hesterly, 2001). In China, the leader

(chairperson or CEO) of an SME can enlarge its external networking to improve its innovation

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capability by joining industry association networks, which consist mainly of business association

networks and technology association networks.

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Business association networks enable enterprises to participate in negotiations, mobilize

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enterprises for regional economic cooperation, and improve cooperation between firms and the

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government. 8 Chinese SMEs have fewer resources, less R&D, and generally face more
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uncertainties and barriers to innovations than do larger firms. To help mitigate these

disadvantages, they participate in networks, which perform several functions. First, they
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represent a response to insecurity arising from development and use of new technologies to
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reduce uncertainties in innovation (Diez, 2002). Second, the business networks help SMEs
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obtain opportunities to cooperate more with the government and promote stronger ties between
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SMEs and other firms, intermediary institutions, and research organizations (Zeng, Xie, & Tam,
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2010). Firms benefit from membership in multiple organizations, which allow them to have more

exposure to different ideas and different sources of information (Carroll & Teo, 1996).

Technology association networks enable SMEs to expand knowledge and acquire new

technology. Technology network theories suggest that innovative firms are linked to a highly

diversified set of agents through networks of collaboration and exchange of information (see, e.g.,

Landry, Amara, & Lamari, 2002). In addition, a firm’s membership in networks allows it to find

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We consider a Chinese firm to have a business association network if its chairperson or CEO is a member in a central
or local government federation of industry and commerce, or holds a private enterprise position in the chamber of
commerce. The business association network provides a bridge between the Chinese government and enterprises.

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more technologically competent partners and facilitate the acquisition of current market

information, including information about technical resources and changes in market technologies

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(Rindfleisch & Moorman, 2001).

These networks help firms adapt to the changing marketplace and enhance enterprise

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innovation. Thus, we propose the following hypothesis.

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Hypothesis 1: Membership in industry association networks such as business association
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networks and technology association networks has a positive effect on innovation at SMEs.
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Networks enable resource-poor SMEs to compete better with larger firms by extending their
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capabilities and know-how (Marinova and Phillimore, 2003). Luo et al. (1998) demonstrated that
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rural SMEs in China have stronger incentives to cultivate guanxi with bureaucrats because they
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have more difficulty in obtaining preferential government treatment—a consequence of the

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“liability of smallness” and lack of legitimacy. Industry associations can help SMEs form close

ties with government offices and financial institutions, which can provide a much more favorable

business environment for SMEs. Moreover, industry associations create close ties with other

firms, which can minimize the costs associated with market uncertainty and help reduce

transaction costs. That is, they can help firms gain access to valuable market information and

enable SMEs to expand knowledge and acquire new technologies.

It is thus expected that these networks help firms increase firm value. By implication, SMEs

should pursue strategies that focus on cultivating these valuable channels (Lee, Lee, & Pennings,

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2001). Networks are, in fact, valuable social capital, which is itself regarded as a source of

competitive advantage (Florin, Lubatkin, & Schulze, 2003). Such networks extend organizational

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capabilities, leading to the creation of competitive advantages for SMEs, and stronger network

ties imply better firm performance at SMEs (Gronum, Verreynne, & Kastelle, 2012). Thus, we

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propose the following hypothesis.

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Hypothesis 2: Participation in industry association networks by SMEs will enhance their

firm value.
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3. Methodology and Data
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3.1 Methodology
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We use a panel data regression analysis to analyze the effects of industry association
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networks on innovation. Our model is expressed as follows:

Innovationit    1 IAN it   2 RDI it   3Tech  staffit   4 Firmsizeit   5 ROAit
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I K (1)
  6 Firmageit    i Yearit    k industrykt   it
1 1

We use patent application data to proxy for innovation because patents are the only

well-established source reflecting innovation activities (Akcomak & Ter Weel, 2009). The patent

application process reflects the firm’s belief that it has engaged in innovation.9 That is, we use

the number of patent applications filed in our study instead of patents granted because the

number of patents granted may understate the number of innovations actually achieved by the

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Salomon & Shaver (2005) find a similar relationship between patent applications and R&D and between patents
granted and R&D.

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firm. There are three types of innovation in Equation (1). Actual invention refers to new products

or improvement from the proposed new technical solutions, and utility patent refers to the

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practical new technology solutions of the product’s shape, structure, or their combination. Design

appearance is a new design for a product’s shape, pattern, or the combination and the

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combination of color and shape, which create a richer aesthetic experience. It seems that the

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technical content of actual invention is high, and the technical content of utility model and design

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appearance is relatively low. Three innovation variables for patent applications are divided by

total sales (in million) to measure the firm’s innovation.10

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The industry association network (IAN) is a proxy variable for a social network, which
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consists of the business association network (BAN) and the technology association network
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(TAN). If the chairman or CEO of the firm (1) is a member of a BAN in a central or local
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government federation of industry and commerce or (2) is a member of a private enterprise

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chamber of commerce, the firm is coded 1, and otherwise 0. We expect BAN to be positively
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related to innovation, according to H1. Similarly, if the chair or CEO is a member of various

professional associations and committees of experts in different industries, such as electronics,

chemistry, textiles, or biological or medical products, the firm is classified with as being a

member of TAN. We expect TAN membership to affect innovation positively, according to H1.

Thus, BAN and TAN offer SMEs access to resources that can promote innovation, opportunities

that might not otherwise be obtained without such membership. Thus, we expect both BAN and

10
We thank the reviewer for suggesting this form to analyze patent. We also use the log form of innovation in the
regression as the dependent variable for our analysis. The results are similar, not reported here. For our panel analysis,
we use the Hausman Chi Square test to examine the proper choice in selecting the fixed-effects model or the
random-effects model.

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TAN variables to be positively related to innovation.

There are many control variables in the regression analysis. RDI measures the R&D

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intensity (in percent), which is R&D expenses over sales, as shown in the literature (Bernstein &

Nadiri, 1988). Tech-staff is the number of technology staff divided by total staff at the firm.

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There are four yearly dummies (I = 4) and 20 industry dummies (K = 20) included in Equation

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(1), whereαis the intercept, εit is residuals, and β1,…,3 represents the regression coefficients.

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Return on assets (ROA) is net income to total assets. Firm size is the natural logarithm of total
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assets at the end of the year. Firm age is the age of the business. For robustness analysis we also

take the natural logarithm of the number of patent applications plus one and use the Tobit model.
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The results are similar to our panel analysis, and thus they further support our results. 11 Each
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model includes the industry and time dummies as control variables.

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Second, if the chairperson or CEO of the firm belongs to a managerial business association
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network (BAN), the firm will be denoted by a (1,0) dummy. That is, it is equal to 1 if the chair
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(CEO) is: (1) a councilperson at a central or local government federation of industry and

commerce; or (2) a member of a private enterprise chamber of commerce. We expect BAN to be

positively related to firm value, according to H2.

Third, if the chair or CEO is a councilperson in a professional association or on a committee

of experts in a specific business area, such as electronic technology, chemistry, textiles, or the

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For the dependent variable of patents, we use the three variables for the patent innovations and also use Tobit model
in addition to our present model for robustness analysis. The results are similar, implying our results are robust. Per the
suggestion of the reviewer, we include a large number of industry dummies at the 4-digit level with 46 industry
dummies.

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biological and medical sector, then the firm is connected to a managerial technology association

network (TAN). We expect TAN to affect Tobin’s q positively, according to H2. In summary,

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because IAN is the sum of BAN and TAN, we expect this variable to be positively related to

Tobin’s q, according to H2.

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In order to understand better how innovation and IAN affect firm performance, the following

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model is developed:

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Tobin' s q     IAN   Innonet   DummR & D   Top1   Shareholders
it 1 it 2 it 3
MA it 4 it 5 it
I K
　   lev   ROA   Firm size    Year    industry  
6 it 7 it 8 it i it k kt it
1 1 (2)
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Tobin’s q, the dependent variable, is calculated as the number of shares multiplied by the
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market price plus the book value of total debts to the book value of total assets. According to H2,
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we expect BAN and TAN (a proxy of IAN) to be positively related to Tobin’s q. This positive
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relationship is similar to the one found in Qiao, Fung, and Ju (2013).

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We use three measures of patents to proxy innovation as defined earlier. According to H2,

we expect that innovation has a positive and significant effect on Tobin’s q. As shown in

Equation (1), IAN affects innovation. So, we cannot simply use the raw measure of innovation

mentioned earlier explicitly in our analysis. Instead, we use Innonet, which is innovation net of

the effect of IAN. Because networks affect innovation, as shown in Equation (1), we thus

introduce this variable to avoid endogeneity problems. To this end, we regress the proxy variable

of innovations on the IAN variable to obtain the residuals, which are used as the Innonet variable.

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We expect Innonet to be able to improve firm performance at SMEs (Gronum, Verreynne, &

Kastelle, 2012) to test H2.

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In Equation (1), we use RDI (i.e., R&D expenses over sales) to measure the R&D intensity

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(in percent) as a control variable. However, in Equation (2), we only use R&D (1,0) dummy

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variable, which is 1 if firms have R&D and 0 otherwise. The reason is to differentiate firms with

and without R&D and to avoid a potential issue of endogeneity as R&D intensity may be closely

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related to innovations in Equation (2). Top 1 is the percentage of shares held by the largest
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shareholder. The Shareholders variable is the natural logarithm of the number of shareholders.

Lev (Leverage) is total liability divided by total assets at the end of the year. Return on assets
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(ROA) is a company’s net income to total assets. Firm size is the natural logarithm of total assets
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at the end of the year. While this relationship has been well established in numerous studies over
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the past few decades, showing that innovation activities and output are important correlates or
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determinants of firm performance, innovation has demonstrated a strong and influential

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relationship in particular to SMEs’ performance (Macdonald, 2004; Raymond & St-Pierre, 2010;

Gronum, Verreynne, & Kastelle, 2012).

To extend the result by Qiao, Fung, and Ju (2013), who show that IAN affect firm financial

performance, we use a regression to examine and understand better the mechanism of how they

do this. That is, we use several measures of the firm’s internal management variables to

investigate how they are affected by IAN in the following regression.

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Operating attributeit    1 IAN it   2Top1it   3 Shareholdersit   4 Firm sizeit

I K (3)
  5 Levit    i Yearit    k industrykt   it
1 1

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We use three variables to measure the behavior of the operating attribute for firm i in

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Equation (3). First, the efficiency variable (firm’s sales over total assets) is computed. We expect

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that the IAN can mainly improve sales turnover at the firm (a measure of efficiency) and add to

costs of managing the innovation process (Barrutia & Echebarria, 2010). We use firm’s sales to

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total assets to measure enterprise efficiency. MA
Second, we use non-operating income—that is, the natural logarithm of non-operating

income, which consists of the disposal of noncurrent asset gains, gains from nonmonetary asset
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transactions, debt restructuring gains, government subsidies, donations, and so on—as the

dependent variable in Equation (3).

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Third, we use management expenses to measure the internal cost of engaging in IAN.

Management expenses are computed using the natural logarithm of management expense, which
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consists of trade union fees, entertainment expenses, travel expenses, board of director expenses,

and so on. Thus, we examine the effect of IAN on the behavior of management expenses (as the

dependent variable) in Equation (3).

3.2 Data and Sample

The sample data for the SMEs (total assets, net income, leverage, and R&D expenses,

among others) come from the China Stock Market and Accounting Research database for

A-share listed companies (SIC codes 2001-2651) on the Shenzhen Stock Exchange Small and

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Medium-size Enterprise Board from 2007 to 2011.12 There were 204 firms at the end of 2007,

531 firms at the end of 2010, and 651 firms at the end of 2011. We exclude (1) financial firms; (2)

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“special treatment companies” (failing firms as classified by the stock exchange); and (3)

companies listed on the exchange for less than a year. Our final sample consists of 597 firms and

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1,905 firm-year observations, covering 21 industries at the two-digit SIC level.

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We manually collected three types of patent applications for each company; the data come

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primarily from the State Intellectual Property Office of the People’s Republic of China Web

site.13 We manually collected personal profiles of chairpersons and CEOs, and business and
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technology association networks for each company. The data come primarily from (1) the
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relevant securities financial Web sites (e.g., szse.cn, which is part of the Shenzhen Stock
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Exchange official Web site); (2) the companies’ annual reports for 2007–2011; and (3)
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Baidu.com, Google, and related search engines.

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4. Analysis and results

4.1 Descriptive Statistics

Table 2 provides a distribution by industry of firms with regard to patent and R&D intensity.

The industry classification is based on specifications of the China Securities Regulatory

Commission. The sample is divided into 21 industries, with nonmanufacturing industries given a

one-digit code and manufacturing industries a two-digit code.14 For the 21 industries in the

12
The A-share market is primarily for domestic Chinese investors.
13
http://www.sipo.gov.cn/zljs/.
14
China’s economy is dominated by manufacturing. In our sample, the manufacturing sector comprises almost 75.71

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sample, the mean values of the highest R&D intensity (RDI: R&D expenses/sales) for industries

are information technology (IT) (0.077), electronics (0.043), biological and medical products

PT
(0.040), and machinery and equipment (0.038). The mean values of the highest proportion of the

technology staff (Tech-staff: number of technical staff/total employees) are in IT (0.488),

RI
architecture (0.303), agriculture (0.215), and real estate (0.211). These are all non-manufacturing

SC
industries.

NU
For the patent analysis, the industries with the highest level of patents are architecture
MA
(1.597), IT (1.328), and electronics (1.328). These industries also have the highest R&D intensity

and highest Tech-staff. The industries with the highest level of utility models are machinery and
D

equipment (1.705), electronics (1.565), and paper making and printing (1.271), while the
TE

industries with the highest level of design appearance are other manufacturing (1.117), paper
P

making and printing (1.088), and electronics (1.038). They are all manufacturing industries,
CE

indicating that the Chinese SMEs in manufacturing are at a relatively low technological level.
AC

[Insert Table2 here]

4.2 Preliminary Results

Table 3 presents summary statistics on Tobin’s q, ROA, efficiency, nonoperating income,

and management costs. Several points are worth noting here.

First, regarding the performance of SMEs, the mean value of Tobin’s q is 1.84, and more

than 75 percent of the companies have a Tobin’s q higher than 1.244. The highest ROA is 19.3

percent. We use a two-digit code to identify the manufacturing industries in this study to control for the sector effects.

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percent, and more than 75 percent of the companies have an ROA higher than 0.037. The

efficiency variable (the highest is 2.189 and the lowest is 0.186), non-operating income (the

PT
highest is 19.722 and the lowest is 0), and management cost (the highest is 21.963 and the lowest

is 15.637) show substantial variation across firms.

RI
Second, regarding innovation and related inputs, the highest R&D intensity (RDI) is 0.460.

SC
Nearly 25 percent of the companies have RDI of more than 0.043. The highest Tech-staff is

NU
0.917, and more than 50 percent of the companies have a smaller Tech-staff than the average of
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0.182. The two variables indicate substantial variation across SMEs. More than 50 percent of

companies have inventions (1.099) and utility model (0.693). The highest patent invention is
D

5.226, and the highest patent utility is 5.204. Nearly 25 percent have design appearance (1.099).
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Innovation at SMEs in China shows a broad range.

P

Third, the mean for BAN is 0.362, and the mean for TAN is 0.467. About 47 percent of the
CE

Chinese SMEs have TAN, and more than one-third of SMEs have BAN.
AC

Finally, the control variables show substantial variation across SMEs. That is, the highest

Top1 is 86.5 percent, and the lowest is 13.2 percent; the highest Shareholder (#) is 12.649, and

the lowest is 1.099; the highest Leverage (Lev) is 76.2 percent, and the lowest is 3.4 percent.

[Insert Table 3 here]

Panel A of Table 4 provides a univariate analysis for firms with different IAN (BAN/TAN).

Tobin’s q is higher for BAN firms than for non-BANs (2.006 vs 1.759, p < 0.01). The difference

is statistically significant. In addition, Tobin’s q for SMEs with TAN is higher it is than for the

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non-TAN group (2.005 vs. 1.711, p < 0.01). Again the difference is statistically significant.

Similarly, other variables, such as R&D intensity (RDI), ROA, and non-operating income, are

PT
higher and statistically significant for SMEs with more IAN than the other group (p < 0.01).

RI
SC
[Insert Table 4 here]

Panel B presents two types of firms according to the different numbers of patent and Tobin’s

NU
q. The results indicate that firms with a higher number of patent applications have a higher
MA
Tobin’s q than firms with a low number of patent applications, and the difference is statistically

significant at the 1% level, indicating that a higher number of patent applications are positively
D

correlated with greater firm value.15 However, firms with a higher level of utility model and
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design appearance do not show a significant difference from those with a lower level.
P
CE

Broadly speaking, firms with more social capital with IAN seem to perform better

financially in terms of ROA and Tobin’s q. Similarly, a greater number of patent applications is
AC

also found to be highly correlated with firm value.

4.3 Regression Analysis and Results

To minimize the effect of outliers on our regression results, we winsorize relevant variables

by removing firms with data at the extremes (less than 0.5 percent of the sample) from our

analysis. In addition, we select the random effect model according to the appropriate test

statistics and also use the Tobit model for robustness analysis. Table 5 presents regression results

15
High (low) patent implies that the number of patents is higher (lower) than the average for its industry.

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that show the effects of IAN on innovation.16

Panel A of Table 5 shows that the coefficient of BAN is positive and significant at the 5% for

PT
invention, and positive but not significant for utility and appearance. The coefficient of TAN is

positive and significant at the 1% level for invention, and positive but not significant for the

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utility model and design appearance; these results indicate that having IAN (TAN/BAN) can

SC
affect invention patent applications at SMEs, which largely supports H1.

NU
[Insert Table 5 here]
MA
The control variable RDI has a positive effect for invention patent applications at the 1%

level and the utility model at the 5% level and positive but not significant for design appearance,
D

showing that a firm’s R&D has a positive effect on firm innovation. Tech-staff has a positive and
TE

significant effect for both invention and utility patent at the 10% level. Our results largely imply
P
CE

that more R&D and technological staff can promote greater innovation. Firm size has a negative

and significant effect on patents at the 1% level, and ROA is negative and significant at the 1%
AC

on invention, but not significant for utility and appearance. These results are largely consistent

with the results of Artz et al. (2010) who show that both ROA and sales growth were found to be

16
We thank the reviewer for suggesting this form to analyze the effects of IAN on innovation. For our panel analysis,
we use the Hausman Chi Square test to select the proper model between the fixed-effects model or the random-effects
model, a standard procedure in the literature. The test results indicate that the random-effects model seems to perform
better than the fixed-effects model. We also include a large number of industry dummy variables (46) at the 4-digit
level. We include control variables such as firm size, ROA, and firm age in Equation (1) and use a count variable for
IAN which shows the number of industry associations. As many firms do not have any innovation, Tobit model is also
equally valid. The Tobit model yields similar results to our random-effects models, implying that our reported results
are robust across models.

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negatively associated with patents.

As many firms do not have any patent applications at some years, the Tobit model is also

PT
appropriate for our analysis. Panel B presents the results of the Tobit model, which are consistent

with our earlier results of the random-effects model. In addition, we calculate the number

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business associations and technology associations each year involved by the firm’s chair or CEO.

SC
We use this count variable for IAN instead of the (1,0) dummy for analysis. Panel C presents

NU
results, which are quite similar to those using the (1, 0) dummy IAN variable presented in Panel
MA
A. The relationship between patent and industry networks is positive and significant and thus

robust across different models and different specifications of network associations.

D

To shed light on the lag structure of the effect of IAN on innovation, we use the one-year
TE

lagged variable for IAN, R&D expenses, and technical staff in our analysis. Panel D shows that
P

the coefficient of the lagged BAN variable is positive and significant at the 1% for
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invention/sales (0.24) and utility/sales (0.263), but not significant for appearance/sales. The
AC

coefficient of TAN is positive and significant for invention/sales (0.425) and utility/sales (0.260)

at the 1% level, while positive but insignificant for appearance/sales. These results indicate that

IAN (TAN/BAN) affects significantly innovation at SMEs, supporting H1. The lagged RDI has a

positive effect for invention patent applications and the utility model at the 1% level, but not for

design appearance. The lagged tech-staff variable has a positive and significant effect on

invention and utility. Our results largely confirm that more R&D and technological staff can have

a significant impact on innovation.

We further divide Chinese firms into SOEs and non-SOEs, following the ownership chain to

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determine the ultimate owner so as to investigate the role of industry association networks (IAN)

on SMEs’ innovation at firms with different ownership structures.17 Also, we classify firms into

PT
high-tech industries and non-high-tech industries.18 Panel E of Table 5 presents the regression

results.

RI
In models 1-4 of Panel E, Table 5 the coefficient of TAN is positive and significant for

SC
invention patents at the 1% level in both SOEs and non-SOEs, and TAN of SOEs seems to have

NU
a have greater effect on invention patents than non-SOEs with TAN (0.340 vs. 0.212) and the

difference is statistically significant at the 10% level.19 BAN is positive and significant at the 1%
MA
for invention patents at both non-SOEs and SOEs, and the coefficient of BAN on SOEs is bigger
D

than non-SOEs (0.268 vs. 0.152), but it does not appear to be significantly different (p > 0.1).
TE

The results further support H1, indicating that industry association networks improve SMEs’
P

innovation across ownership structures, their effect appear to be stronger at SOEs.

CE

In Models 5-8, which analyze high-tech industries and non-high-tech industries, the
AC

coefficient of TAN on innovation is positive and significant for invention patents at the 1% level,

BAN is positive and significant at the 1% level for invention patents in high-tech industries, and

significant at the 10% level for invention patents in non-high-tech industries, implying that IAN

(BAN/TAN) has a positive effect on SMEs’ innovation in both high-tech industries and non-high

17
SOEs are controlled by the government or its various entities, such as the State-Owned Asset Supervision and
Administration Commission or the Ministry of Finance (Asset Management Bureaus and Finance Bureaus at the local
level), while non-SOEs are controlled by families, foreign investors, collective enterprises, or social entities.
18
The National Bureau of Statistics of China issued a notice on the high-technology industry statistical classification
catalogue on November 21, 2006. High-tech industries include petroleum, chemicals, electronics, machinery,
equipment, medical, biological products, and IT (see Website http://www.stats.gov.cn/tjbz/t20061123_402369836.htm).
19
We use the Chow test to investigate the equality of coefficients in the two separate equations between SOEs and
non-SOEs.

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industries, but its effect appears to be relatively stronger in high-tech industries.

Thus, in a mixed market-oriented and government-controlled economy like China’s, industry

PT
association networks are an important means of obtaining key resources and an important way to

protect property rights by establishing a relationship with the government and to improve

RI
technical innovation. The chair or CEO who is a member of various industry associations in

SC
different industries can help enterprises enlarge their external networking and obtain greater

NU
access to resources, information about business environments, and better technological
MA
know-how. Our results are largely consistent with H1, implying that membership in industry

association networks can indeed promote greater innovation.

D

Table 6 reports regression results for patents and IAN on Tobin’s q, or financial performance
TE

of SMEs. In Models 1–3, invention patent (invention coefficient = 0.055, p < 0.01) is positive
P

and statistically significant at the 1% level, while the utility model (coefficient = 0.024) and
CE

design appearance (coefficient = – 0.009) are not statistically significant. These results show that
AC

only invention patent really promotes long-term financial performance for the SMEs, while the

other measures of innovation do not. The results are important because they provide evidence of

the critical link between innovation and Tobin’s q, which is largely missing in the literature,

especially for Chinese SMEs.

According to H2, we need to examine how IAN plays an important role in firm value. To

this end, we introduce two variables: Innonet (BAN) (i.e., innovation net of the BAN effect) and

Innonet (TAN) (innovations net of the TAN effect). They are the residuals obtained from

regressing appropriate measures of inventions on BAN and TAN, respectively.

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In Model 4, the effect of BAN (coefficient = 0.248, p < 0.01) on Tobin’s q is positive and

statistically significant at the 1% level. The effect of Innonet (BAN) (coefficient = 0.042, p <

PT
0.05) on Tobin’s q is positive and significant at the 5% level. In Model 5, the effect of TAN

(coefficient = 0.187, p < 0.01) on Tobin’s q is positive and significant at the 1% level while the

RI
effect of Innonet (TAN) (coefficient = 0.045, p < 0.05) is positive and significant at the 5% level.

SC
The results further support H2, confirming that SMEs with IAN have higher firm value and can

NU
outperform enterprises that lack IAN.

In Models 1-5, the R&D dummy variable has a significant and positive effect on Tobin’s q at
MA
the 1% level, implying a significant difference in value between the R&D firms and the
D

non-R&D firms. Top1 (Biggest owner) has a negative and significant effect on Tobin’s q while
TE

Shareholders has a positive and significant effect, a result consistent with corporate governance
P

theory (Maury & Pajuste, 2005), which suggests that it is better for enterprises to have a lower
CE

proportion of shares held by the largest shareholder and a greater number of shareholders. In
AC

addition, ROA and Lev have a significant and positive effect on Tobin’s q, while firm size has a

significant negative effect on firm value.

[Insert Table 6 here]

In this section, we introduce three dependent variables to test how IAN affects operating

attributes of firms. First, we use firm’s sales over total assets to measure enterprise efficiency.

Second, to measure non-operating income, we use the natural logarithm of non-operating income

of a firm, which consists of disposal of noncurrent asset gains, gains from nonmonetary assets

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transactions, debt restructuring gains, government subsidies, donations, and others. Third, for

management expenses, we use the natural logarithm of management expenses, which consist of

PT
trade union fees, entertainment expenses, travel expenses, expenses by the board of directors,

and so on. To understand better how IAN affects firm operations, we examine the effect of IAN

RI
on efficiency, non-operating income, and management expenses.

SC
Table 7 reports regression results for IAN on three different operating attributes of the firm.

NU
Models 1–2 indicate that IAN (BAN/TAN) are positively related to efficiency. The positive and
MA
significant effect of IAN as a measure of social capital (BAN coefficient = 0.044, p < 0.05; TAN

coefficient = 0.032, p < 0.1) on efficiency supports H2, implying that developing more IAN can
D

help a company become more efficient in its operations by cutting waste , a result consistent with
TE

Gronum, Verreynne, and Kastelle (2012), who argue that membership in industry association
P

networks can reduce risk, innovation time, and costs and thus help enterprise improve
CE

effectiveness.
AC

In Models 3–4, the effects of BAN on non-operating income is positive and statistically

significant (p <0.1), and the effects of TAN on non-operating income are positive and statistically

significant (p < 0.05). The results support H2, indicating that BAN and TAN help firms improve

their profitability or income. It is likely that belonging to these networks is helpful for obtaining

scarce resources and government subsidies.

In Models 5–6, we also find that the coefficients of BAN (p < 0.05) and TAN (p < 0.1) on

management expenses are all positive and statistically significant. The results indicate that the

establishment of IAN is costly and can cause executive management expenses/costs to rise.

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[Insert Table 7 here]

PT
5. Conclusions

RI
We use panel data analysis to examine factors that affect firm value for SMEs listed on the

SC
Shenzhen Stock Exchange Small and Medium-sized Enterprises Board from 2007 to 2011. Our

NU
sample consists of 1,905 companies. We document several interesting results.

First, we find that R&D and technology staffs have a positive and significant effect on
MA
innovation by SMEs. These results imply that investment in R&D and human capital at SMEs is
D

crucial for spurring innovation. In addition, industry association networks (business association
TE

networks and technology association networks) have a positive effect on innovation at SMEs.
P

Our study contributes to the literature by establishing a link between social networks (industrial
CE

association networks) and innovation in a competitive market. It should be noted that the positive
AC

link is likely attributable in part to the policies of the Chinese government that promote business

and technology networks (Guan et al., 2009).

Second, our results clearly indicate that SMEs are fully utilizing industrial association

networks to enhance firm value, confirming that IAN can help SMEs obtain resources and

maintain a competitive advantage. In addition, we find that innovation in terms of inventions has

a positive and significant effect on firm performance beyond the effect by IAN. Our results

extend and join with those of Marinova and Phillimore (2003), confirming that innovation is a

key factor in the survival, growth, and development of Chinese SMEs.

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Third, IAN have a positive effect on efficiency, implying that networks help reduce

executives’ environmental complexity and ambiguity by providing timely and relevant

PT
information for strategic decision making (Laforet, 2012; Peng & Luo, 2000). In addition, IAN

has a positive effect on non-operating income at SMEs. The results imply that IAN can help

RI
SMEs obtain preferential tax rates and long-term bank loans and be awarded more government

SC
subsidies. Developing IAN can be costly, so we find that management expenses increase.

NU
Our research on Chinese SMEs has several policy implications. First, it seems apparent that
MA
initiating the Chinese National Program for Medium- and Long-Term Scientific and

Technological Development (2006–2020) has been an important and necessary step in improving
D

the manufacturing-based enterprises. The Chinese government should continue to encourage

TE

SMEs to develop more R&D activities. Second, the Chinese government should speed up the
P

administrative system reforms that would foster a healthier environment and growth of industry
CE

associations and guide SMEs to participate in the activities of industry associations. Finally, the
AC

Chinese SMEs should recognize the importance of IAN and innovation that can enhance firm

performance and evaluate carefully the associated costs that can affect the firm’s operations.

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Figure 1 R&D expenditures in the selected countries in 2010

T
R IP
SC
NU
MA
D

Source: http://www.oecd-ilibrary.org/statistics; The Network on Science and

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Technology Indicators Ibero-American and Inter-American (RICYT);

http://www.sts.org.cn/zlhb/2013/hb2.1.htm#_1/.
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CE
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Figure 2 Innovations in BRICS and selected developed countries

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IP
# of patents
1600000

R
1400000

SC
Japan
1200000

1000000

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800000 USA

600000
MA
400000 China

200000
D

0 Other Brics
Year 2006 2007 2008 2009 2010 2011
P TE

Source: World Intellectual Property Organization (WIPO) statistics database,

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http://www.wipo.int/portal/index.html.en/.
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Table 1: Characteristics of Industry Association Networks

The industry association network (IAN) is a proxy variable for a social network, which
consists of the business association network (BAN) and the technology association network
(TAN). If the chairman or CEO of the firm (1) is a member of a BAN in a central or local

T
government federation of industry and commerce or (2) is a member of a private enterprise
chamber of commerce, the firm is coded 1, and otherwise 0. If the chair or CEO is a member

IP
of various professional associations and committees of experts in different industries, such as
electronics, chemistry, textiles, or biological or medical products, the firm is classified with

R
as being a member of TAN. BAN is (1,0) dummy variable denoting business association

SC
network and TAN is (1,0) dummy variable denoting technology association network.
Number. of BAN TAN
year
Firms Number % Number %

NU
2007 197 71 36.04 86 43.65
2008 284 99 34.86 125 44.01
2009 335 120 35.82 152 45.37
MA
2010 510 187 36.67 242 47.45
2011 579 216 37.31 290 50.09
2007-2011 1,905 693 36.38 895 46.98
Source: The China Stock Market and Accounting Research database and the State Intellectual
D

Property Office of the People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

P TE
CE
AC

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Table 2: Patent and R&D intensity of industry distribution

Firms are divided into 21 industries, with nonmanufacturing industries given a one-digit code
and manufacturing industries a two-digit code according to the China Securities Regulatory
Commission (CSRC). RDI is R&D expenses over sales. Tech-staff is the total number of

T
technology staff divided by total number of employees at the firm at the end of the year.
Invention is the natural logarithm of the actual invention application number plus one at the

IP
end of the year. Utility is the natural logarithm of the utility model application number plus
one at the end of the year. Appearance is the natural logarithm of appearance design

R
application number plus one at the end of the year.

SC
Industry name Industry Patent
RDI Tech-staff
code Invention Utility Appearance
Agriculture A 0.009 0.215 0.246 0.155 0.221

NU
Mining B 0.017 0.137 0.577 0.466 0.000
Food, beverage C0 0.016 0.097 0.836 0.406 0.649
MA
Textiles, apparel C1 0.015 0.132 0.593 0.628 0.507
Timber, furniture C2 0.009 0.091 0.451 1.115 0.714
Paper making, printing C3 0.022 0.154 0.672 1.271 1.088
Petroleum, chemicals, etc C4 0.027 0.141 0.970 0.710 0.431
D

Electronics C5 0.043 0.191 1.328 1.565 1.038

TE

Metal, nonmetal C6 0.023 0.126 0.913 1.181 0.927

Machinery, equipment ,etc C7 0.038 0.182 1.199 1.705 1.004
P

Medicine, biological products C8 0.040 0.202 1.304 0.213 0.297

Other manufacturing C9 0.022 0.101 0.935 1.180 1.117
CE

Power, gas, and water D 0.015 0.111 0.343 0.297 0.000

Architecture E 0.018 0.303 1.597 1.168 0.296
AC

Transportation F 0.020 0.025 0.461 0.404 0.000

IT G 0.077 0.488 1.328 1.212 0.888
Retail H 0.002 0.043 0.590 0.286 0.175
Real estate J 0.002 0.211 0.178 0.133 0.000
Social services K 0.014 0.192 0.839 0.671 0.155
Communications L 0.018 0.000 0.256 0.077 0.077
Conglomerate M 0.000 0.051 0.387 0.000 0.000
All average 0.033 0.182 1.022 1.070 0.714
Source: The China Stock Market and Accounting Research database and the State Intellectual
Property Office of the People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

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Table 3: Descriptive statistics

Tobin’s q is the market value of total equity plus the book value of total debt to the book
value of total assets. Return on assets (ROA) is net income to total assets. Efficiency is firm’s
sales over total assets. Non-operating income is the natural logarithm of non-operating

T
income: disposal of noncurrent asset gains, gains from nonmonetary assets transactions, debt
restructuring gains, government subsidies, donations, etc. Managing expense is the natural

IP
logarithm of managing costs: trade union fees, entertainment expenses, travel expenses, board
expenses, etc. Sales is the total sales at the end of the year. Ln_Sales is the total sales in log

R
while Ln_R&D is the natural logarithm of R&D expense plus one. RDI is R&D expenses over sales.

SC
Tech-staff is the total number of technology staff divided by total number of employees at the firm at
the end of the year. Invention is the actual invention application number plus one (in log) at the end of
the year. Utility is the natural logarithm of utility model application number plus one. Appearance is

NU
the natural logarithm of design appearance application number plus one. BAN is (1,0) dummy
variable for business association network and TAN is (1,0) dummy variable for technology
association network. DummyR&D is a dummy variable for firms to have R&D. Top 1 is the
MA
percentage of shares held by the largest shareholder. Shareholders（#）is the number of shareholders in
log. Firm size is total assets in log at the end of the year. Lev (Leverage) is total liabilities divided by
total assets. Firm age is the age of the business.
variable N mean Sd min p25 p50 p75 max
D

Tobin's q 1905 1.84 0.963 0.852 1.244 1.529 2.065 5.397

TE

ROA 1905 0.063 0.042 -0.052 0.037 0.059 0.084 0.193

Efficiency 1905 0.7 0.396 0.186 0.441 0.602 0.847 2.189
P

Non-operating income 1905 15.662 1.484 0 14.966 15.775 16.511 19.722

Management expense 1905 17.904 0.796 15.637 17.361 17.839 18.429 21.963
CE

Sales 1905 1.6e+09 4.0e+09 2.3e+07 4.3e+08 8.6e+08 1.6e+09 9.4e+10

Ln_Sales 1905 20.594 0.989 16.967 19.886 20.567 21.207 25.265
AC

Ln_R&D 1905 13.237 6.982 0 14.254 16.659 17.434 21.742

RDI 1905 0.033 0.044 0 0.001 0.027 0.043 0.460
Tech-staff 1905 0.182 0.172 0 0.075 0.128 0.228 0.917
Invention 1905 1.022 1.075 0 0 1.099 1.792 5.226
Utility 1905 1.070 1.208 0 0 0.693 1.946 4.234
Appearance 1905 0.714 1.106 0 0 0 1.099 4.17
BAN 1905 0.362 0.481 0 0 0 1 1
TAN 1905 0.467 0.499 0 0 0 1 1
DummyR&D 1905 0.787 0.41 0 1 1 1 1
Top 1 1661 0.379 0.143 0.132 0.266 0.373 0.486 0.865
Shareholders(#) 1661 9.65 0.742 1.099 9.270 9.634 10.059 12.649
Firm size 1905 21.08 0.745 19.705 20.549 21.006 21.525 23.202
Lev 1905 0.346 0.187 0.034 0.191 0.328 0.486 0.762
Firm age 1905 11.369 4.992 1.000 8.000 11.000 14.000 37.000

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Source: The data come from (1) the relevant securities financial websites (e.g., szse.cn, which
is part of the Shenzhen Stock Exchange official website); (2) the companies’ annual reports
for 2007–2011; (3) Baidu.com, Google, and related search engines; (4) the China Stock
Market and Accounting Research database; and (5) the State Intellectual Property Office of
the People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

T
R IP
SC
NU
MA
D
P TE
CE
AC

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Table 4: Summary statistics for the variables

Tobin’s q is the market value of total equity plus the book value of total debt to the book
value of total assets. R&D intensity (RDI) is the percentage of firm R&D expenses over sales.
Ln_R&D is the natural logarithm of the firm’s R&D expenses plus one at the end of the year.
Return on assets (ROA) is the ratio of a company’s net income to total assets. Efficiency is

T
the firm’s sales over total assets. Non-operating income is the natural logarithm of

IP
non-operating income: disposal of noncurrent asset gains, gains from non-monetary assets
transactions, debt restructuring gains, government subsidies, donations, etc. Management

R
expense is the natural logarithm of management costs: trade union fees, entertainment

SC
expenses, travel expenses, board of director expense, etc. The t-test tests for the equality of
means between BAN/TAN companies. ***, **, and * significant at the 1, 5, and 10 percent
level, respectively.

NU
Panel A: Tobin’s q, RDI, ROA, Efficiency, Non-operating income, and Operating Costs on
MA
the industry association network (BAN/TAN)
BAN TAN t-Test t-Test
With Without With Without (p-value) (p-value)
(1) (2) (3) (4) H0:(1)=(2) H0:(3)=(4)
D

Tobin's q 2.006 1.759 2.005 1.7111 5.4252 *** 6.7138***

TE

RDI 0.033 0.033 0.038 0.028 0.0447 4.9409***

Ln_R&D 13.850 12.973 14.53732 12.197 2.6613 *** 7.4721 ***
ROA 0.068 0.060 0.068 0.058 4.0041*** 5.5615***
P

Efficiency 0.754 0.669 0.712 0.690 4.5073*** 1.2205*

CE

Non-operating income 15.850 15.556 15.837 15.509 4.1770*** 4.854***

Management expenses 18.040 17.827 17.972 17.845 5.6834*** 3.508***
Source: The data come from (1) the relevant securities financial websites (e.g., szse.cn, which
AC

is part of the Shenzhen Stock Exchange official website); (2) the companies’ annual reports
for 2007–2011; (3) Baidu.com, Google, and related search engines; and (4) the China Stock
Market and Accounting Research database.

Panel B: The Effect of High and Low Numbers of Patent Applications on Tobin’s q.
High (low) patent implies that the number of patent applications is higher or lower than
annual average for the industry. The t-test tests for the equality of means between high- and
low-patent companies. The Kruskal-Wallis statistics tests for the equality of the medians
between these two groups. ***, **, and * significant at the 1, 5, and 10% level, respectively.
t-Test Kruskal-Wallis
Patent Level Tobin's q
(p-value) Test (p-value)
High 1.937
Invention 3.6864*** 0.000
Low 1.774
High 1.849
Utility 0.0435 0.2731
Low 1.847
Appearance High 1.826 0.7321 0.1360

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Low 1.860
Source: The data come from (1) the China Stock Market and Accounting Research database;
and (2) the State Intellectual Property Office of the People’s Republic of China’s website at
http://www.sipo.gov.cn/zljs/

T
R IP
SC
NU
MA
D
P TE
CE
AC

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Table 5: Regressions of innovation on industry association networks

The industry association network (IAN) is a proxy variable for social network, which consists
of the business association network (BAN) and the technology association network (TAN).
BAN is (1,0) dummy variable for business association network and TAN is (1,0) dummy

T
variable for technology association network. Invention/sales is the actual invention
application number divided by the total sales at the end of the year; utility/sales is the utility

IP
model application number divided by the total sales at the end of the year; appearance/sales is
the design appearance application number divided by the total sales at the end of the year;

R
RDI is R&D expenses over sales; tech-staff is the total number of technology staff divided by

SC
total number of employees at the firm at the end of the year; firm size is total assets in log at
the end of the year; return on assets (ROA) is net income to total assets; and firm age is the
age of the business.

NU
Panel A: Random-effects regressions for patents scaled by sales (in million) as the
dependent variable
MA
invention/sales utility/sales appearance/sales
(1) ( 2) (3) (4) (5) (6)
RDI 3.049*** 3.231*** 2.341** 2.483** 1.323 1.419
D

(3.25) (3.44) (2.20) (2.34) (1.33) (1.43)

Tech-staff 0.501* 0.552* 0.640* 0.638* -0.086 -0.105
TE

(1.73) (1.89) (1.91) (1.89) (-0.27) (-0.33)

BAN 0.214** 0.025 0.116
P

(2.44) (0.24) (1.15)

CE

TAN 0.352*** 0.149 0.033

(4.19) (1.47) (0.34)
Firm size -0.249*** -0.256*** -0.295*** -0.295*** -0.210*** -0.208***
AC

(-3.69) (-3.78) (-3.60) (-3.59) (-2.64) (-2.60)

ROA -2.340*** -2.115** -0.227 -0.085 -0.307 -0.232
(-2.59) (-2.34) (-0.22) (-0.08) (-0.32) (-0.24)
Firm age 0.001 0.000 0.018 0.018 0.008 0.008
(0.06) (0.01) (1.54) (1.56) (0.65) (0.68)
Intercept 5.448*** 5.539*** 6.260*** 6.266*** 4.693** 4.678**
(3.29) (3.32) (3.10) (3.10) (2.39) (2.38)
Industry Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes
N 1905 1905 1905 1905 1905 1905
chi2 200.519 186.471 154.023 151.711 130.103 131.393
Adj. R2 0.247 0.236 0.206 0.203 0.096 0.093
Notes: For explanations of the abbreviations, please see the note to Table 4, panel A. ***, **,
and * significant at the 1, 5, and 10% level, respectively.

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Source: The data come from (1) the relevant securities financial websites (e.g., szse.cn, which
is part of the Shenzhen Stock Exchange official website); (2) the companies’ annual reports
for 2007–2011; (3) Baidu.com, Google, and related search engines;(4) the China Stock
Market and Accounting Research database; and (5) the State Intellectual Property Office of
the People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

T
R IP
SC
NU
MA
D
P TE
CE
AC

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Panel B: Tobit regression for patents scaled by sales (in million) as dependent variable
invention/sales utility/sales appearance/sales
(1) ( 2) (3) (4) (5) (6)
RDI 3.038*** 3.210*** 2.396** 2.532** 1.358 1.444
(3.27) (3.45) (2.29) (2.42) (1.38) (1.47)

T
Tech-staff 0.501* 0.552* 0.651** 0.650** -0.073 -0.091

IP
(1.75) (1.92) (1.98) (1.97) (-0.23) (-0.29)
BAN 0.213** -0.010 -0.102

R
(2.45) (-0.10) (-1.04)

SC
TAN 0.351*** 0.151 0.031
(4.23) (1.55) (0.32)
Firm size -0.249*** -0.256*** -0.292*** -0.292*** -0.209*** -0.207***

NU
(-3.74) (-3.82) (-3.68) (-3.68) (-2.72) (-2.68)
ROA -2.337*** -2.110** -0.245 -0.103 -0.362 -0.289
MA
(-2.63) (-2.37) (-0.24) (-0.10) (-0.38) (-0.31)
Firm age 0.001 0.000 0.018 0.018 0.008 0.008
(0.06) (0.01) (1.60) (1.61) (0.70) (0.72)
Intercept 0.912*** 0.924*** 1.185*** 1.189*** 1.218*** 1.221***
D

(23.60) (23.84) (25.41) (25.37) (25.87) (25.82)

TE

Industry Yes Yes Yes Yes Yes Yes

Year Yes Yes Yes Yes Yes Yes
P

N 1905 1905 1905 1905 1905 1905

chi2 205.215 190.204 168.385 165.360 131.853 132.527
CE

Prob>Chi2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Notes: For explanations of the abbreviations, please see the note to Table 4, panel A. ***, **,
AC

and * significant at the 1, 5, and 10% level, respectively.

Source: The data come from (1) the relevant securities financial websites (e.g., szse.cn, which
is part of the Shenzhen Stock Exchange official website); (2) the companies’ annual reports
for 2007–2011; and (3) Baidu.com, Google, and related search engines; (4) the China Stock
Market and Accounting Research database; (5) the State Intellectual Property Office of the
People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

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Panel C: Random-effects regressions for patents scaled by sales (in million) as dependent
variable.
The industry association network (IAN) is a proxy variable for a social network, which consists
of the business association network (BAN) and the technology association network (TAN).We
use a count variable for IAN (BAN and Tan) representing the number of business and

T
technology association networks involved.

IP
invention/sales utility/sales appearance/sales
(1) ( 2)

R
(3) (4) (5) (6)
RDI 3.006*** 3.248*** 2.326** 2.448** 1.258 1.320

SC
(3.22) (3.46) (2.19) (2.31) (1.27) (1.33)
Tech-staff 0.483* 0.532* 0.635* 0.646* -0.091 -0.080

NU
(1.67) (1.83) (1.89) (1.92) (-0.29) (-0.25)
BAN 0.103*** 0.018 0.027
(2.92) (0.44) (0.69)
MA
TAN 0.207*** 0.083* 0.057
(5.65) (1.85) (1.31)
Firm size -0.266*** -0.259*** -0.301*** -0.297*** -0.214*** -0.212***
D

(-3.97) (-3.82) (-3.68) (-3.62) (-2.68) (-2.66)

ROA -2.479*** -2.198** -0.276 -0.129 -0.401 -0.326
TE

(-2.76) (-2.43) (-0.27) (-0.13) (-0.42) (-0.34)

Firm age 0.000 0.001 0.018 0.018 0.008 0.008
P

(0.04) (0.11) (1.57) (1.58) (0.72) (0.73)

CE

Intercept 5.838*** 5.641*** 6.406*** 6.291*** 4.778** 4.729**

(3.55) (3.40) (3.17) (3.12) (2.43) (2.41)
Industry Yes Yes Yes Yes Yes Yes
AC

Year Yes Yes Yes Yes Yes Yes

N 1905 1905 1905 1905 1905 1905
chi2 218.444 190.651 155.830 152.186 131.928 130.610
Adj. R2 0.260 0.244 0.208 0.205 0.095 0.097
Notes: For explanations of the abbreviations, please see the note to Table 4, panel A. ***, **,
and * significant at the 1, 5, and 10% level, respectively.
Source: The data come from (1) the relevant securities financial websites (e.g., szse.cn, which
is part of the Shenzhen Stock Exchange official website); (2) the companies’ annual reports
for 2007–2011; (3) Baidu.com, Google, and related search engines;(4)the China Stock Market
and Accounting Research database; and (5) the State Intellectual Property Office of the
People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

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Panel D: Random-effects regressions for patents scaled by sales (in million) as dependent
variable using a lag structure of input variables
RDIt-1 is last year R&D expenses over last year total sales at the end of the year. Tech-staff t-1
is the total number of technology staff of the last year divided by total number of employees at
the firm of the last year at the end of the year. BANt-1 is (1,0) dummy variable for business

T
association network at the last year and TANt-1 is (1,0) dummy variable for technology
association network at the last year.

IP
invention/sales utility/sales appearance/sales

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

SC
RDIt-1 3.725*** 3.978*** 2.538** 2.596** 1.333 1.301
(3.60) (3.82) (2.39) (2.44) (1.32) (1.29)

NU
Tech-staff t-1 0.574* 0.704** 0.956*** 1.080*** 0.131 0.183
(1.90) (2.29) (3.07) (3.45) (0.44) (0.61)
BAN t-1 0.240*** 0.263*** 0.119
MA
(2.78) (2.98) (1.42)
TAN t-1 0.425*** 0.260*** 0.063
(5.23) (3.11) (0.79)
D

Firm size -0.236*** -0.247*** -0.219*** -0.230*** -0.092 -0.097

(-3.82) (-3.96) (-3.45) (-3.62) (-1.53) (-1.61)
TE

ROA -3.146*** -2.904*** -0.953 -0.950 -1.846** -1.914**

(-3.36) (-3.07) (-0.99) (-0.99) (-2.01) (-2.09)
P

Firm age -0.005 -0.005 0.007 0.006 0.005 0.005

CE

(-0.55) (-0.58) (0.76) (0.67) (0.60) (0.54)

Intercept 5.136*** 5.369*** 4.592*** 4.844*** 1.933 2.046
(3.37) (3.49) (2.93) (3.09) (1.29) (1.37)
AC

Industry Yes Yes Yes Yes Yes Yes

Year Yes Yes Yes Yes Yes Yes
N 1287 1287 1287 1287 1287 1287
chi2 274.020 250.730 293.079 292.116 129.169 130.688
Prob>Chi2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Notes: For explanations of the abbreviations, please see the note to Table 4, panel A. ***, **,
and * significant at the 1, 5, and 10% level, respectively.
Source: The data come primarily from (1) the relevant securities financial websites (e.g.,
szse.cn, which is part of the Shenzhen Stock Exchange official website); (2) the companies’
annual reports for 2007–2011; (3) Baidu.com, Google, and related search engines;(4)the
China Stock Market and Accounting Research database; and (5)the State Intellectual Property
Office of the People’s Republic of China’s website at http://www.sipo.gov.cn/zljs/

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Panel E：Tobit model regression for invention Patents scaled by sales (in million) as
dependent variable conditioned on different types of SMEs
SOEs are controlled by the government or its various entities, such as the State-Owned Asset
Supervision and Administration Commission or the Ministry of Finance (Asset Management
Bureaus and Finance Bureaus at the local level), while non-SOEs are controlled by families,

T
foreign investors, collective enterprises, or social entities. High-tech industries include
petroleum, chemicals, electronics, machinery, equipment, medical, biological products, and

IP
IT. Non-high-tech industry is other industries.

R
SOEs Non-SOEs High-tech industry Non-High-tech industry

SC
(1) (2) (3) (4) (5) (6) (7) (8)
RDI 2.093* 2.405* 4.316*** 4.555*** 5.495*** 6.051*** 5.120*** 5.074***
(1.93) (1.87) (4.73) (4.95) (4.82) (5.29) (3.89) (3.80)

NU
Tech-staff 1.397* 1.916** 0.237* 0.301* 0.967*** 1.095*** 0.709*** 0.874***
(1.83) (2.49) (1.87) (1.81) (3.05) (3.41) (2.83) (3.45)
MA
BAN 0.268*** 0.152*** 0.310*** 0.0578*
(3.08) (4.97) (6.61) (1.67)
TAN 0.340*** 0.212*** 0.312*** 0.169***
(4.38) (7.51) (7.91) (4.73)
D

Firm size -0.546*** -0.542*** -0.191*** -0.192*** -0.315*** -0.291*** -0.177*** -0.191***
TE

(-3.74) (-3.65) (-3.68) (-3.65) (-4.30) (-3.95) (-3.24) (-3.46)

ROA 0.548 1.207 -4.007*** -4.012*** -2.614** -2.463** -1.343 -1.244
(0.23) (0.51) (-4.85) (-4.80) (-2.27) (-2.12) (-1.27) (-1.16)
P

Firm age 0.0756*** 0.0573** -0.00732 -0.00492 0.00302 0.00712 -0.0144* -0.0139*
CE

(3.09) (2.32) (-1.14) (-0.76) (0.31) (0.72) (-1.79) (-1.72)

Intercept 11.40*** 11.32*** 4.435*** 4.432*** 6.907*** 6.425*** 4.005*** 4.353***
(3.57) (3.49) (3.76) (3.71) (4.53) (4.19) (3.50) (3.76)
AC

Industry Yes Yes Yes Yes No No No No

Year Yes Yes Yes Yes Yes Yes Yes Yes
N 370 370 1535 1535 1150 1150 755 755
chi2 218.3 203.6 501.5 461.1 166.2 145.6 80.64 59.58
Prob>Chi2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Notes: For explanations of the abbreviations, please see the note to Table 4, panel C. ***, **,
and * significant at the 1, 5, and 10% level, respectively.
Source: The data come primarily from (1) the relevant securities financial Web sites (e.g.,
szse.cn, which is part of the Shenzhen Stock Exchange official Web site); (2) the companies’
annual reports for 2007–2011; (3) Baidu.com, Google, and related search engines;(4)the China
Stock Market and Accounting Research database for A-share listed companies; (5)the State
Intellectual Property Office of the People’s Republic of China Web site
http://www.sipo.gov.cn/zljs/ ;and (6) http://www.stats.gov.cn/tjbz/t20061123_402369836.htm

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Table 6: Effect of patent and industry association network on Tobin’s q

Tobin’s q is the market value of total equity plus the book value of total debt to the
book value of total assets. Return on assets (ROA) is net income to total assets.
Efficiency is firm’s sales over total assets. Invention is the actual invention application

T
number plus one (in log) at the end of the year. Utility is the natural logarithm of utility model
application number plus one. Appearance is the natural logarithm of design appearance

IP
application number plus one. BAN is (1,0) dummy variable for business association network
and TAN is (1,0) dummy variable for technology association network. Innonet (BAN) is the

R
regression residual obtained from regressing invention on BAN. Innonet (TAN) is the

SC
regression residual obtained by regression invention on TAN. DummyR&D is a dummy
variable for firms to have R&D. Top 1 is the percentage of shares held by the largest
shareholder. Shareholders（#）is the number of shareholders in log. Firm size is total assets in

NU
log at the end of the year. Lev (Leverage) is total liabilities divided by total assets.
(1) (2) (3) (4) (5)
Invention 0.055***
MA
(2.62)
Utility 0.024
(1.21)
D

Appearance -0.009
(-0.46)
TE

BAN 0.248***
(5.48)
P

Innonet (BAN) 0.042**

CE

(2.03)
TAN 0.187***
(4.23)
AC

Innonet (TAN) 0.045**

(2.14)
DummyR&D 0.222*** 0.228*** 0.237*** 0.201*** 0.201***
(3.76) (3.83) (4.00) (3.43) (3.40)
Top 1 -0.495*** -0.517*** -0.518*** -0.531*** -0.451***
(-3.17) (-3.29) (-3.31) (-3.45) (-2.90)
Shareholders(#) 0.140*** 0.139*** 0.141*** 0.132*** 0.134***
(4.46) (4.41) (4.48) (4.23) (4.30)
Firm size -0.467*** -0.462*** -0.456*** -0.466*** -0.458***
(-11.69) (-11.49) (-11.38) (-11.83) (-11.51)
Lev 1.114*** 1.131*** 1.126*** 1.061*** 1.096***
(7.12) (7.21) (7.19) (6.86) (7.05)
ROA 8.081*** 8.115*** 8.171*** 7.799*** 7.828***
(13.31) (13.33) (13.44) (12.92) (12.88)

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Intercept 9.661*** 9.565*** 9.406*** 9.704*** 9.483***

(12.77) (12.55) (12.39) (12.98) (12.54)
Industry Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes
N 1661 1661 1661 1661 1661

T
2
chi 673.916 663.270 666.107 719.213 697.939

IP
2
Adj. R 0.242 0.243 0.240 0.248 0.247
Notes: For explanations of the abbreviations, see the notes to Tables 1 and 2. ***, ** and *

R
significant at the 1, 5, and 10% level, respectively.

SC
Source: The data come primarily from (1) the relevant securities financial Web sites
(e.g., szse.cn, which is part of the Shenzhen Stock Exchange official Web site); (2) the
companies’ annual reports for 2007–2011; and (3) Baidu.com, Google, and related

NU
search engines;(4)the China Stock Market and Accounting Research database for
A-share listed companies; (5)the State Intellectual Property Office of the People’s
Republic of China Web site http://www.sipo.gov.cn/zljs/
MA
D
P TE
CE
AC

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Table 7: Regression analysis of industry association networks on efficiency,

non-operating income, and management expense.
Efficiency is firm’s sales over total assets. Non-operating income is the natural logarithm of
non-operating income: disposal of noncurrent asset gains, gains from nonmonetary assets
transactions, debt restructuring gains, government subsidies, donations, etc. Managing

T
expense is the natural logarithm of managing costs: trade union fees, entertainment expenses,
travel expenses, board expenses, etc. BAN is (1,0) dummy variable for business association

IP
network and TAN is (1,0) dummy variable for technology association network. Top 1 is the
percentage of shares held by the largest shareholder. Shareholders（#）is the number of

R
shareholders in log. Firm size is total assets in log at the end of the year. Lev (Leverage) is

SC
total liabilities divided by total assets.

Efficiency Non-operating income Management expenses

BAN
(1)
0.044**
(2)
NU (3)
0.145*
(4) (5)
0.060**
(6)
MA
(2.50) (1.73) (2.29)
TAN 0.032* 0.166** 0.043*
(1.85) (2.04) (1.65)
D

Top 1 0.278*** 0.289*** -1.155*** -1.101*** -0.216* -0.203*

TE

(3.65) (3.78) (-3.85) (-3.67) (-1.82) (-1.72)

Shareholders(#) -0.011 -0.011 -0.017 -0.017 0.005 0.006
(-1.45) (-1.43) (-0.36) (-0.35) (0.47) (0.49)
P

Firm size -0.105*** -0.106*** 0.806*** 0.810*** 0.579*** 0.579***

CE

(-6.76) (-6.77) (11.34) (11.41) (24.51) (24.52)

Lev 0.336*** 0.342*** 0.143 0.166 0.355*** 0.365***
(6.65) (6.78) (0.57) (0.67) (4.68) (4.81)
AC

Intercept 2.559*** 2.556*** -0.999 -1.161 4.709*** 4.688***

(7.87) (7.85) (-0.71) (-0.82) (9.49) (9.44)
Industry Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes
N 1661 1661 1661 1661 1661 1661
2
Chi 373.664 370.190 374.085 375.834 3726.795 3710.805
2
Adj. R 0.130 0.130 0.097 0.096 0.750 0.749
Notes: The t-test tests for the equality of means between firms with and without BAN
and TAN. ***, ** and * significant at the 1, 5, and 10% level, respectively.
Source: The data come primarily from (1) the relevant securities financial Web sites
(e.g., szse.cn, which is part of the Shenzhen Stock Exchange official Web site); (2) the
companies’ annual reports for 2007–2011; (3) Baidu.com, Google, and related search
engines;(4)the China Stock Market and Accounting Research database for A-share
listed companies; and(5)the State Intellectual Property Office of the People’s Republic
of China Web site http://www.sipo.gov.cn/zljs/

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Highlights
 Research and development (R&D) and technology staffs have a positive effect on innovation at
Chinese SMEs.
 Participation in industry association networks can improve firm innovation at Chinese SMEs.
 Innovation is found to have a positive effect on firm performance at Chinese SMEs.


T
Membership in industry association networks can improve firm efficiency and increase
non-operating income but at the expense of higher management costs in Chinese SMEs.

R IP
SC
NU
MA
D
P TE
CE
AC

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