Elite Patronage and Firm Innovation in China

Existing scholarship predominantly examines how elite patronage influences the behaviour of political elites, while the ways in which businesses perceive and respond to patronage dynamics remain understudied. This study addresses this gap by investigating the impact of local leaders’ patronage status, defined as their position relative to the supreme leader within patronage networks, on firms’ research and development (R&D) activities in China. The central argument is that patronage dynamics can function as informative signals about the local policy environment, and that firm innovation behaviour varies systematically with these signals. Specifically, firms are more likely to increase R&D investment when local leaders are part of the supreme leader's network, perceiving these connections as indicative of stable and favourable conditions for innovation. In addition, changes in local leaders’ patronage status drive firms to stabilise their R&D investment levels to mitigate risks associated with potential political uncertainty. This argument is tested using firm-level panel data of Chinese listed companies, with findings strongly supporting the hypotheses. The extensional analysis shows that non-state-owned enterprises are more responsive to patronage dynamics than state-owned enterprises, that firms in highly regulated sectors exhibit greater sensitivity to these dynamics than their counterparts in less regulated sectors, and that the impact of patronage dynamics is moderated by national leadership's explicit innovation agenda. This study enhances our understanding of the political economy of firm innovation as well as the impact of elite patronage on business activities.