Central State‐Owned Enterprise Ownership and Local State‐Owned Enterprise Innovation: Evidence From China

ABSTRACT

This study examines a previously unexplored corporate governance mechanism, that is, the presence of central state‐owned enterprises (SOEs) as non‐controlling shareholders in local SOEs in China, and investigates its impact on corporate innovation. Our research reveals that central SOE ownership enhances local SOE innovation. Further analyses based on the 2016 top‐down innovation‐related policy and policy uncertainty provide additional evidence that central SOE ownership serves as a channel for transmitting policy information to local SOEs and improves their innovation. Moreover, we show that central SOE ownership and private ownership function as complements in fostering innovation of local SOEs. The positive effect of central SOE ownership, however, is attenuated by stronger local government intervention and greater geographic distance between local and central SOEs. Overall, our findings highlight the governance role of central SOE ownership, attributable to its higher hierarchical position within the political system. By illuminating the role of shareholder identity and political hierarchy, this study contributes to the literature on non‐controlling shareholders and extends research on the heterogeneity of state ownership, thereby offering important implications for SOE governance.