State Ownership Structure and Innovation
Moderation of government intervention and
market competition
Master Thesis
Hang Chen (11377208)
UNIVERSITY OF AMSTERDAM, FACULTY OF ECONOMICS &BUSINESS
Msc. in Business Administration - International Management Track Final version submitted by: Hang Chen, 11377208
Submission Date: June 23, 2017 Supervisor: Dr. M. Mihalache Second Reader: Dr. V. Scalera
|Thesis H. Chen II STATEMENT OF ORIGINALITY
This paper is written by Hang Chen who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
|Thesis H. Chen III ACKNOWLEDGEMENTS
First of all, I would like to thank my supervisor, Dr. Mashiho Mihalache, for all her efforts. With her patience and excellent guidance, she has encouraged me to continuously improve my paper. I have learned a lot from her supervision and feedback. It is her support and guidance that encouraged me to finish my studies successfully. In addition, I would like to extend my appreciation to my second reader, Dr. Vittoria Scalera, for taking the time and the effort to evaluate this thesis.
Secondly, I would like to thank my friends and fellow students. The one-year Master course was hectic and I am glad that they gave good advice and shared experience with me about study and life in the Netherlands.
Finally, I would like to thank my parents, as they are the financial sponsors of my master period. Their endless support has encouraged me to finish my studies
|Thesis H. Chen IV TABLE OF CONTENTS List of Tables... V List of Figures... VI Abbreviations... VII Abstract...VIII 1. Introduction... 1 2. Literature review... 5
2.1 State ownership structure... 5
2.2 Innovation... 7
2.3 Government intervention... 9
2.4 Market competition intensity... 10
3. Conceptual framework and hypotheses... 12
3.1 The relationship between state ownership structure and innovation... 12
3.2 The relationship between government intervention and innovation... 15
3.3 The relationship between market competition intensity and innovation... 18
4. Methodology... 21 4.1 Research design... 22 4.2 Data collection... 23 4.3 Measurement of variables... 24 4.3.1 Dependent variable... 24 4.3.2 Independent variable... 25 4.3.3 Moderator variables... 25 4.3.4 Control variables... 26 5. Results... 28
5.1 Analytical strategy, descriptive statistics and correlation... 28
5.2 Hypothesis testing with hierarchical multiple regression... 31
6. Discussion... 33
6.1 State ownership structure, innovation performance and the moderating effects... 33
6.2 Implications... 36
6.3 Limitations and future research... 38
7. Conclusion... 40
Reference... 43
|Thesis H. Chen V LIST OF TABLES
Table 1. Fields of innovation supported by the governments of major countries... 51
Table 2. Published PCT International Applications by Top Five Applicants... 52
Table 3. Regions that cited Huawei’s and ZTE’s patents... 52
Table 4. Summary of the variables used and their measurement... 27
Table 5. Means, Standard Deviations and Correlations... 29
|Thesis H. Chen VI LIST OF FIGURES Figure 1.Government funds to high-tech industries in China from 2004 to 2013.... 51
|Thesis H. Chen VII ABBREVIATIONS
AATT Advanced Air Transport Technology AMP Advanced Material Processing AMT Advanced Materials Technology ARM Advanced Robotics for Manufacturing CIS Community Innovation Survey
DEA Data Envelopment Analysis
HPC High Performance Computing
ICT Information and Communication Technology
MPI Malmquist Index of Productivity
PCT Patent Cooperation Treaty
R&D Research and Development
SOE State Owned Enterprises
|Thesis H. Chen VIII ABSTRACT
This study analyzes whether state ownership structure influences firms’ innovation capabilities, and tests how the effect differs on condition that receiving government funds and operating in highly competitive markets. With globalization bringing opportunities as well as competition, China’s SOEs are on their way of transformation. Therefore, we want to know how China’s SOEs change to adapt to the volatile markets and what role the government plays in the transformation process. This study proposes that China’s SOEs have been successfully transformed, from inefficient production units operating under the state’s economic plan, into profitable, incorporated business entities. Furthermore, it hypothesizes that SOEs will generate less innovation outputs when receiving government funds or operating in highly competitive markets. To evaluate these hypotheses, a sample of 28 sub-sectors of China’s high-tech industries has been analyzed using quantitative methods. The findings of this empirical study suggest that there is a significant and positive relationship between state ownership structure and firms’ innovation performance. But this relationship is negatively moderated on condition that receiving government funds or operating in highly competitive markets. The results of this study also provide various implications and contributions for future research.
KEY WORDS：state ownership structure, SOEs, innovation performance,
|Thesis H. Chen 1 1. Introduction
Innovation has become a key source for enterprises and countries to obtain substantial profits, accelerate the development of economy and enhance their competitiveness in 21st century. Gaining success via innovation is no more a rare case nowadays. We are familiar with the broadly spread story that contemporary giants, such as Apple and Google, gain enormous success worldwide through innovation in terms of technology, products, service and resource. In addition, through innovation in business model and service, Uber and Airbnb gain rapid success in business and achieve worldwide fast expansion. Therefore, vigorously promoting innovation has become a common consensus among not only developed countries but also emerging countries. The key fields of innovation that are advocated and supported by the government of major countries are presented in Table 1 (in the Appendix), showing that developed countries are more concerned about innovations and technologies that shape the future, whereas emerging countries are still left behind in such fields. But it is also noticeable that China has marked the high-tech industrial technology as one of the major driving forces of its economic development.
Extremely benefiting from its economic reform and globalization, China has become the second largest economy in the world since 2010 (Teather, 2010). Yet, globalization brings opportunities as well as competition. In recent years, the Chinese government has placed much emphasis on the term “innovation”. This is because
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besides the fact that innovation has been seen as a key factor for firms to survive the increasingly severe market competition, it acts as the most significant driving force that accelerates the Chinese economic growth as well. Among all the industries, the high-tech industries are definitely the most significant dynamic of China’s innovation. In addition to the fact that the high-tech industries have been investing substantial expenditure on research and development (R&D) activities, these industries have been receiving considerable subsidies from the central government and local governments. The conventional view argues that government subsidies can stimulate the R&D efficiency of firms in the high-tech industries (Radas, Anić, Tafro, and Wagner, 2015; Kang & Park, 2012). But meanwhile, these financial aids can also negatively influence those firms’ innovation performance (Hong, Feng, Wu, and Wang, 2016; Yu, 2013).
China’s state owned enterprises (SOEs) are a major composition of the national economy, but the role that SOEs play in China’s economy remains ambiguous. This is because China’s SOEs have been typically labelled as inefficient organizations of corruption, low-productivity, low-flexibility and little innovation. In contrast, China’s non-SOEs are often seen as the new engines of its innovation dynamic nowadays, as the Chinese government has shown a tendency to decrease the proportion of SOEs in Chinese economy and to increase that of non-SOEs during last decades.
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“the share of SOEs in the country’s gross industrial output, for example, fell from one half in 1998 to one quarter in 2011. The number of SOEs owned by the central government has fallen from 196 in 2003 to 115 in March 2013” (Fan & Hope, 2012,
p.2)
Does the Chinese government really view SOEs as unproductive organizations? Do China’s SOEs fall behind the competition of innovation? But if it is the case, why does the Chinese government contends that the reform of China’s SOEs is the separation of management and ownership but not the total privatization of SOEs. For example, the recent initiatives include (1) the introduction of proper recruitment and appointment systems for top-level management and external directors, (2) the requirements for SOEs to increase their dividend payouts, and (3) the efforts to address interconnected party transactions (Fan & Hope, 2012). Moreover, we observe that in the domestic markets, especially in strategically important industries and sectors, China’s major SOEs still continue to play a dominant role. Therefore, it draws our concerns about the actual role that SOEs play in the economic development in modern China. Thus, this paper aims to answer the following questions. (1) What is the role that SOEs play in China’s innovation catch up? (2) Do the government subsidies effectively stimulate SOEs’ innovation capabilities? and (3) What is an ideal market environment for maximizing the magnitude of SOEs’ innovation outputs?
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it is necessary to carry out a study on the relationship between state ownership structure and innovation performance. Given the fact that the effects of exogenous environment may generate ambiguous results and in order to make it appropriate for the research purpose, this study also examines the effects of two exogenous factors, one is the government intervention effects and the other is the market competition effects. This study is important because it combines both the internal and external influential parameters, provides an alternative view on the identification of the influential parameters in innovation, and indicates the ideal condition for the the Chinese government to make smart, efficient and effective investment in innovation in terms of market condition.
This paper contributes to the up-to-date research in several ways. To the best of the author’s knowledge, most of the current research on the endogenous effect of state ownership structure on innovation are qualitative approaches. Thus, this study provides an alternative perspective of research on these fields. Secondly, this study serves to integrate the effects of exogenous environment condition in order to examine the interaction effects on promoting firms’ innovation capabilities in the real world, so as to distinguish the innovation capabilities of China’s SOEs under different conditions. Therefore, this paper provides an overall analysis on the role that China’s SOEs play in the innovation catch up of China.
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review of the main theoretical foundations of this study will be described in the following section. Second, based on the theoretical concepts, the conceptual framework of this study and hypotheses will be introduced in the following section. Afterwards, in the methodology section, the database used in this study and the measurement of the variables will be explained. In the next section, we will present and discuss the results and findings that emerged from the quantitative analysis. Finally, we will elaborate the findings and implications of this study and also indicate the limitations and suggestions for future research.
2. Literature review
This section is dedicated to the review of previous literature on the three parameters and innovation. Previous research is an important foundation for the thesis, as it indicates diverse perspectives on each dimension and thereby provides the gap for this study. Further, this section will use the theoretical discussion as the indicators for the development of hypotheses.
2.1 State ownership structure
It has been a long history since the emergence of China’s SOEs. When the People’s Republic of China was established in 1949 and the whole country was recovering from a long period of war and underdevelopment, it was China’s SOEs that gradually
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undertook the tasks to rebuild the country. In addition to their historical role of rebuilding the country, they also carry heavy social responsibilities. They provide not only employment, but also a diverse range of social services, including medical care, health care, education and retirement protection (Fan & Hope, 2012).
The economic reform in China since 1978 has involved a shift from centralized economic planning economy towards a more market-oriented one (Xiao, Yang, and Janus, 2009). The economic reform process has been propelled internally via gradual, regular and incremental adjustments in institutions (Webber, Barnett, Wang, Finlayson, and Dickinson, 2008), in which the Chinese government embarks on large-scale SOEs reform and privatization of SOEs (Russell, Ghosh, Goodall, & Donald, 2010). During the long period of gradual and progressive transformation, many inefficient SOEs have been shut down or merged. Although this transformation was painful, it was made less disruptive and was compensated by China’s rapid economic growth. As a result of the economic reform, the economic weight of China’s SOEs has been declined substantially (Fan & Hope, 2012). This is because the economic reform has opened up the entry gate to more industrial sectors for non-SOEs and thereby changed the domestic monopolistic markets into competitive ones.
In contrast to Russia and India, the reform of SOEs in China has been unique in its own way. Russia adopted the abrupt approach to privatization after the breakdown of the economies in all former Soviet Union partner countries in the 1990s, whereas China
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has taken a more gradual approach for the steady expansion of SOEs assets and profits, and the accumulation of power and influence among SOEs. Moreover, in China, the privatization of SOEs has occurred simultaneously with large-scale improvement of infrastructure and still relatively low urban unemployment, while India has to cope with high urban unemployment and poor industrial infrastructure (Fan & Hope, 2012). At the macro level, the whole economic reform process in China can be viewed as a strategic adjustment towards a more market-oriented economy; at the micro level, the economic reform is planned to transform China’s SOEs into modern corporations (Xiao et al., 2009).
Although China’s SOEs have been criticized for their low efficiency and productivity for a long period of time, they still remain a dominant weight of the domestic economy in modern China, nevertheless the Chinese government’s efforts to privatization and its commitment to market-oriented economy. Thus, it is of importance to evaluate the actual role of China’s SOEs in its economy.
2.2 Innovation
In most studies, innovation refers to the application of new and improved ideas, processes, products, services that brings new utility or quality in the application (Mataradzija, Rovcanin, and Mataradzija, 2013). A conventional innovation process starts with R&D activities regarding a new or improved product with in an organization.
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Thus, technological inventions or improvements are traditionally viewed as the drivers of innovation (Van Rijn, 2012). Among the diverse research on innovation, Schumpeter (1934) suggests one of the most well-known definition of innovation that innovation is the combination of new or existing knowledge, resources, equipment and so on, and thereby identifies five major types of innovation: (1) new products, (2) new methods of production, (3) newly emerged markets, (4) new sources of supply of raw materials, and (5) new organizational designs of any firms in any industry (Knudsen & Swedberg, 2009).
In a broader sense, innovation can be seen as the tool that reduces inputs, administration and production costs, increases productivity and efficiency, and thereby leads to increased competitiveness of firms, industries and countries. In the narrow sense, innovation includes intellectual property, such as invention, patent, license, know how, industrial design etc. (Mataradzija et al., 2013). Particularly, in knowledge intensive industries, patents are widely used to protect inventions. Since this study is quantitative database research, innovation mainly refers to technological innovation and thereby the number of patents is used for the measurement of technological innovation performance of firms. Although this is a flawed measure of technological innovation performance because not all innovations can be patented (Allred & Park, 2007), the number of patents has been widely used as a general measure of innovation performance in a large body of extant literature (Ahuja & Katila, 2001; Salomon & Jin,
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2010; Ren, Eisingerich, and Tsai, 2015).
2.3 Government intervention
Directly or indirectly, government is involved in innovation development. Normally, government has been the sponsor, shaper and diffuser of an innovation (Moon & Bretschneider, 1997). Particularly for the late-coming nations to catch up in innovation, support of the government proves to be crucial (Iyer, Laplaca, and Sharma, 2006; Siu, Lin, Fang, and Liu, 2006). In general, government often affects innovation through the implementation of three major policies, which are the supply-oriented policy, the demand-oriented policy and the environment-oriented policy. Among the three policies, the supply-oriented policy seems to be the most common approach. As a direct involvement of government in innovation, the supply-oriented policy includes the provision of subsidies for R&D activities, intellectual infrastructures, skilled and educated workforce, lands and technical assistance to new businesses (Moon & Bretschneider, 1997; Li et al., 2007).
The high-tech industries are ones of the most significant industries in modern China. The central and local governments are keen to develop the high-tech industries, and thereby offer special policies and have been offering substantial government subsidies to firms of high-tech industries to encourage firms’ R&D capabilities since the 1980s. Statistics show that, in order to promote firms’ R&D capabilities, the Chinese
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government has offered approximately 60.17 billion Yuan since its economic reform in 1987 (Hong et al., 2016). The total amount of government funds put into the high-tech industries has increased from 2.25 billion Yuan in 2004 to 16.64 billion Yuan in 2013, with an average annual growth rate of 22% (Figure 1 in the Appendix). Therefore, examining whether government funds stimulate firms’ innovation performance as expected is of great importance.
2.4 Market competition intensity
In this paper, market competition intensity mainly refers to the definition of the intensity of rivalry among competitors in an industry or a market (Porter, 1979). According to Porter’s 5 forces framework, the intensity of rivalry existing in a market acts as one of the main forces that shape the competitive structures of a market.
A competitive market refers to a market where exists many buyers and sellers, free entry and exit. For instance, new firms must be able to easily enter the market and the firms are the ‘price takers’, meaning that they cannot set prices to whatever level they want but have to accept the market equilibrium price where supply equals demand (Pettinger, 2017). On the one hand, fierce rivalry results in the competition for profits and market shares among competitors. This often reduces the potential range of profits for all firms within the industry. On the other hand, low intensity of competitive rivalry makes an industry less competitive and thus increases the potential range of profits for
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the existing firms (Wilkinson, 2017).
Early economic view suggests that intensive degree of competition in a market is likely to promote more innovation outputs. This is based on Schumpeter’s (1942) proposition that intensive market structures provide incumbent firms with the incentives to protect their existing market profits and thereby to innovate. However, Arrow (1962) offers an alternative view that the monopoly position may rather reduce firms’ incentives to innovate than encourage them to innovate. This is because innovation requires constant investment in R&D activities and thus waste the opportunities to enjoy the monopoly profits it could enjoy without innovating (Sharpe & Currie, 2008). Accordingly, the conflicting propositions attract us to conduct an in-depth research on the effects of the degree of market competition intensity on fostering firms’ innovation performance.
To conclude the literature review, it is evident that previous research does not yet find consistent results. This paper does not deny the significant role of non-SOEs as the new engine of China’s economic growth. But previous literature has been so diverse on the role of SOEs that a further research is necessary to carry out. Moreover, by including exogenous parameters of government intervention and market competition, this paper aims to provide an understanding of how these factors boost better innovation performance. In the next section, the effect of state ownership structure on innovation performance and exogenous effects on this relationship will be discussed.
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3. Conceptual framework and hypotheses
Figure 2. Conceptual framework
3.1 The relationship between state ownership structure and innovation
The role of SOEs increasingly commands research attention on modern China. A sound judgment of past reform experience and their influence is no easy task since the reform of SOEs in China has been such a controversial subject in the literature
(Garnaut & Song, 2013).
In general, China’s SOEs are linked with conclusive competitive advantages, including land use rights, financial resources, and are usually the beneficiaries of major policy initiatives (Zhao & Lan, 2015). This is because China’s SOEs are established and administered by the central government or local government. This born tie can fix market failure through direct government intervention (Dong, Zhai, and Yang, 2016) and permits large SOEs to enjoy certain privileges, particularly in government-supported finance, subsidies, procurements and regulations (Song, Yang, and Zhang,
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2011). As a result of this privileged position, China’s SOEs are often considered to have more resources to innovate in contrast to non-SOEs.
Nevertheless, traditional literature often associates China’s SOEs with low productivity, low efficiency and monopolies with poor innovation performance, because they are not geared toward real market conditions, especially in those industries and sectors that do not allow private companies to enter. This monopoly position often leads to incumbent inertia and consequently China’s SOEs have little incentives to innovate (Song et al., 2011). This proposition is also supported by the resource-based view, which suggests that SOEs typically lack technological, financial, and managerial resources, and thus rule out the possibilities for internal growth (Peng, 2001). The mainstream explanation originates from the lack of real market competition, particularly in the strategically important industries and sectors. Specifically, China’s SOEs often enjoy monopoly or duopoly position in telecommunications, financial services, infrastructure construction, energy and raw materials, (Xiao et al., 2009; Belloc, 2014).
In recent years, however, contrary to the conventional literature view, most studies have indicated that China’s SOEs are more innovative or are more efficient innovators than expected. China’s SOEs have been in a gradual and incremental transformation process since the economic reform and opening-up policies began in 1978 (Fan & Hope, 2012). The business environment is changing rapidly together
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with the technological development and they have to align to the volatile
environment. The Chinese government, via the economic reform since 1978, has successfully transformed many large SOEs in strategic markets, from inefficient production units into profitable incorporated business entities (Fan & Hope, 2012). In addition, more recent studies start to provide evidence indicating a positive
relationship between state ownership structure and innovation performance. Among those studies, Fu, Vijverberg, and Chen (2008) evaluate the variations of SOEs’ productivity and efficiency in terms of macroeconomic fluctuations and systematic reform in China during the period from 1986 to 2003. They use data envelopment analysis (DEA) to evaluate SOE performance and Malmquist Index of Productivity change, referred to as MPI, to measure productivity growth. The empirical study finds that the performance of efficiency and productivity of China’s SOEs presents obvious improvements during periods of strong systematic reform and a prosperous economy, thereby indicating that the systematic reform after 1998 has a distinct effecton improving SOEs’ performance. Another research carried out by Zhao and Lan (2015) finds an increasing trend of non-SOEs’ contribution to innovation, which is consistent with previous studies. Meanwhile, they also find that each SOE generates more new products and capitalizes more value for each new product than non-SOEs. The results of their study suggest that China’s SOEs are no longer impeding the innovation development at the current stage, thereby indicating that they may have been
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performing an important role in the recent innovation catch up in China. Thus, we propose the following hypothesis to examine the effect of state ownership structure on innovation performance:
Hypotheses 1: A positive relationship exists between state ownership structure and innovation performance.
3.2 The relationship between government intervention and innovation
Government subsidies may stimulate firms’ R&D capabilities for the following reasons. First, the government subsidies for R&D activities can lower the total private cost of the project. Receiving government subsidies may therefore turn an unprofitable project into a profitable one. Second, by receiving government subsidies, firms are allowed to allocate the funds for the setting up or upgrading current research facilities. Or it may also be used to compensate the fixed cost of other current and future R&D projects. Finally, there may also be a spillover of learning and know-how gained in the subsidized project to other current and future R&D projects, thereby increasing their prospects of success and their profitability (Lach, 2002; Dong et al., 2016)).
Furthermore, in spite of the fact that government may confront different innovation tasks and different challenges in technology development and diffusion stages, the degree of state or local government intervention in fostering innovation is positively
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associated with diffusion. The diffusion-facilitating efforts, for instance the provision of financial support to R&D activities, up-to-date information about innovations, and procedural facilitation of development can positively affect an industry's adoption decision for new innovation (Moon & Bretschneider, 1997).
Some empirical studies also indicate a positive relationship between government grants and innovation performance. Among those studies, Hong et al. (2016) use a panel data set consisting of 17 high-tech industries in China spanning the period from 2001 to 2011 to explore the effects of government grants on the technological innovation performance of the high-tech industries. The results of their study indicate that the innovation efficiency of the high-tech industries has enhanced rapidly in the last decade and thereby suggesting the positive role that government R&D grants have been playing in promoting firms’ technological innovation outputs. In a most recent study, Szczygielski, Grabowski, Pamukcu, and Tandogan (2017) analyze the institutional frameworks of the manufacturing firms in Turkey and Poland, using data from the 2010 Community Innovation Survey (CIS). They assess how the innovation policies in both countries are formulated and implemented, as well as SOEs’ efficiency and productivity. Their findings indicate that government grants for R&D activities contribute to better innovation performance of firms in both countries. The stimulation effects are also found in Hong, Hong, Wang, Xu, and Zhao’s (2015) research, indicating that government funds stimulate private R&D expenditure rather than crowd out private
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funds, and private R&D funds have positively influenced innovation in China’s high-tech industry.
However, the principal-agent theory does not support the government subsidies’ positive effects on promoting firms’ innovation performance. This is because that the separation of ownership and control in organizations may cause the agency problem, which may be particularly worse in SOEs than in non-SOEs. A possible explanation could be that the lack of supervision and incentive mechanism and accountability may ruin the resources for innovation, thereby causing dual efficiency losses - productive efficiency loss and innovative efficiency loss (Wu, 2012). In consequence, the stimulation effects of government R&D grants on innovation may be weakened or even become negative.
On the other hand, the stimulation effects of government subsidies on non-SOEs are considered to be less complex. This is because that non-SOEs are often constrained from raising sufficient funds and with limited resources to innovate (Lin, Lin, and Song 2011), therefore they are more eager for government R&D subsidies. Moreover, non-SOEs are superior in initiative and flexibility in the process of innovation (Liang, Lu, and Wang, 2012). Accordingly, non-SOEs can often implement plans more efficiently and effectively than SOEs. Thus, we propose the following hypothesis:
Hypothesis 2: The relationship between state ownership structure and innovation performance is negatively moderated by the degree of government intervention.
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3.3 The relationship between market competition intensity and innovation
The newly appointed President of the United States, Donald Trump with his anti-globalization sentiments, has put the spotlight on the term “anti-globalization” worldwide. He criticizes the impact of globalization on international trade, because globalization has increased the degree of market competition in their home country (Dunn, 2015). Indeed, developing countries, for instance, China, in particular, have greatly benefited from globalization. As a result of globalization, firms’ from emerging countries can often provide products at a much lower price and thereby be in a position of advantage in terms of market competition. Furthermore, globalization brings the local firms from emerging countries more possibilities and access to capital pools, technology, human capital, cheaper imports and larger export markets (McCubbrey, 2017) and can thereby improve their competitiveness in innovation. Here are the examples of successful Chinese companies that have achieved creativity by adopting technological innovation. The two Chinese telecommunication equipment manufacturers, ZTE Corporation and Huawei Technologies Co, Ltd. rank 1 and 3 respectively as Patent Cooperation Treaty (PCT) applicants (Table 2 in the Appendix). Their patents have been widely cited and filed from 25 different regions (Table 3 in the Appendix). Both companies are operating in the same industry and from the same region (Shenzhen) in China but are different in ownership structure, with ZTE Corporation owned by the state and HUAWEI privately owned. It is noticeable that ZTE, a SOE, outperformed the other top applicants, all
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SOEs, in terms of R&D.
Meanwhile, the local firms from emerging countries are currently facing the threat that posed by globalization, because they are subject to the competition of firms from developed countries, which are often with manifest advantages in technology, capital resources and networks. Aghion, Bloom, Blundell, Griffith, and Howitt (2005) point out in their study that under the effects of market competition on the equilibrium industry structure, market competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. For instance, the wave of local factory closing that has happened in China mainland during the last decade can be attributed to the increasing level of market competition raised by the entry of foreign companies. Most of the local firms are left behind in technology in the first place, and with markets taken by the competitors from developed countries, most of the local firms subsequently have little incentives to innovate and eventually are forced to exit the markets.
In more in-depth reviews on the relationship between market competition intensity and innovation, three notable studies (Geroski, 1990; Nickell, 1996; Blundell, Griffith, and Van Reenen, 1999) support the positive association between market competition intensity and innovation (Sharpe & Currie, 2008). Arrow (1962) suggests that a monopoly position may also reduce firms’ incentives to innovate. A competitor can make more profits than a monopolist from innovation, and the
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monopolist may be left behind in the replacement with a superior product or process compared to a newcomer. This is because a monopolist firm calculates the innovation profit on its current products as the difference between its current monopoly profits and the innovation profits from new products, whereas the competitor regards the innovation profits from new product as the gain. Thus, the larger current monopoly profits are, the less incentive the monopolist firm has to innovate (Poyago-Theotoky, Lambertini, and Tampieri, 2015).
However, a conflicting view on the relationship between innovation and the increasing market competition intensity is based on Schumpeter’s (1942) argument that an inverse relationship exists between innovation and market competition
intensity. He proposes that the more monopolistic firms are, the more readily they can perform R&D activities. This is because monopolistic firms face less market
uncertainty and often have abundant funds so that they can make stable and constant investment in R&D activities (Inui, Kawakami, and Miyagawa, 2008). Poyago-Theotoky et al. (2015) also indicate in their study that greater market power often results in greater innovation outputs for the following reasons. First, the more ability that an incumbent monopolist possesses, the more likely it will find innovation attractive. Second, substantial profits encourage firms with greater market power to implement finance innovation internally. Third, firms with greater market power
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typically have more resources and thus are more likely to have access to the most innovative human resource. Thus, we propose the following hypothesis:
Hypothesis 3: The relationship between state ownership structure and innovation performance is negatively moderated by the degree of market competition intensity.
To summarize the hypotheses, the interactive effects are described in the conceptual framework presented in Figure 2. The framework and the hypotheses, focus on the positive effects of state ownership structure may have on firms’ innovation performance. However, on condition that receiving government subsidies or operating in highly competitive market, the positive effects of state ownership structure on innovation will be weakened and subsequently SOEs will generate less innovation outputs.
4. Methodology
In this section, the methodology of this research is explained. At first, the research design is given, followed by a description of the sample population and the method of data collection. Then the various variables, their sources and their use are explained. In the end, the methods of data analysis that we employed in this research are elaborated.
|Thesis H. Chen 22 4.1 Research design
The study will be quantitative database research. By doing so, as many data of China’s high-tech industries as possible can be included in the research and reliable and objective research that is usable in generalizing findings can be produced. The research is deductive, because there are hypotheses tested but no new theories generated. The aim of the study is to find the effects of state ownership structure on promoting firms’ innovation capabilities and to see whether the effects are different on condition that receiving government funds and operating in highly competitive market.
State ownership structure is the independent variable and innovation performance is the dependent variable. Furthermore, government funds and market competition intensity are added as moderating variables. The two moderators will be tested separately, in order to get a better idea of the specific factor, in which causes differences in the effects of state ownership structure on innovation performance. Finally, control variables are R&D institutions, revenue, private funds and external R&D expenditure. All of the data was collected by the State Intellectual Property Office of China, and published in the China Statistics Yearbook on High Technology Industry and is combined to one dataset (Hong et al., 2015; Hong et al., 2016). The conceptual model will be tested with correlation and hierarchical multiple regression analyses in order to develop possible relations between the variables.
|Thesis H. Chen 23 4.2 Data collection
This research provides an industry-level approach of research. In order to obtain a comprehensive view of China’s innovation development, our overall sample population is the high-tech industries of China mainland. The criteria of our sample selection are the industries that (1) are knowledge intensive, (2) are active in innovative activities, and (3) are eligible to apply for government grants. By applying these criteria, we ensure that the sample industries in our study are comparable in terms of innovation initiative and policy support. This database consists of a panel survey conducted on a yearly basis by the National Bureau of Statistics of China between 2010 and 2015. The population are narrowed to five main manufacturing industries (e.g. Medicine, Aircrafts and Spacecrafts and Related Equipment, Electronic Equipment and Communication Equipment, Computers and Office Equipment, Medical Equipments and Measuring Instrument) and are further grouped into 28 sectors. The high-tech industries are selected for the following reasons. First, they serve as the most significant technological innovation force in China’s innovation catch up. Second, these industries represent a strong technological innovation atmosphere, a plurality of talent accumulation. Third, they are composed of a variety of ownership structures, containing SOEs and non-SOEs (Dong et al., 2016). These characteristics ensure that the sample firms in our study are comparable in terms of endogenous factor (ownership structure) and exogenous environment (market competition and government intervention).
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All the data used in this study are obtained from the China Statistics Yearbook on High Technology Industry and China Statistical Yearbook 2008–2014. Specifically, number of patent applications, amount of government funds, number of firms in each sector of the high-tech industries, and ownership structures are collected from above data source. Since the database is derived from official statistics, it is therefore considered appropriate for the purpose of this study.
4.3 Measurement of variables 4.3.1 Dependent variable
• Innovation performance: The number of patents is widely used as a measure of
innovation performance (Svensson, 2008; Hong et al., 2015; Hong et al., 2016; Dong et al., 2016). The number of domestic patents is collected by the State Intellectual Property Office of China, and published in the China Statistics Yearbook on High Technology Industry. Given that it often takes several years, due to the patent office’s efficiency and performance, for an invention patent application to be granted, the number of patents granted may not be able to accurately reflect the actual level of innovation outputs. Thus, the number of domestic patent applications was used as a measure of innovation performance in this study (Hong et al., 2015; Hong et al., 2016; Li, 2011).
|Thesis H. Chen 25 4.3.2 Independent variable
• State ownership structure: In order to compare the innovation performance in
terms of different ownership structures and to find out the potential relationships. In this study, ownership structures are categorized into two groups, state owned enterprises and private owned enterprises, excluding enterprises funded by Hong Kong, Macau, Taiwan and foreign countries. This variable will be measured as a dummy variable, taking the value of 1 if a firm is state owned and 0 otherwise (Dong et al., 2016).
4.3.3 Moderator variables
• Government intervention: To find out the role that government plays in innovation
development, government funds are employed as the moderating factor. In particular, the degree of government intervention is measured as the total amount of annual government funds obtained by a sector (Hong et al., 2015; Hong et al., 2016).
• Market competition intensity: Among various quantitative measures of market
competition intensity (number and size of firms in a market), conduct (behavior of these firms) and performance (market outcomes) (Sharpe & Currie, 2008), in this study this figure is measured by the number of firms in a sector due to unavailability of alternative data, nevertheless it is ambiguous as a market with two or three large firms can be as competitive as a market consisting of several hundreds of small firms depending on
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how aggressive the behavior of the firms is (Ye, Shen, and Lu, 2014).
4.3.4 Control variables
• R&D institutions: In general, the more R&D institutions in one sector, the more
innovation outputs the sector may generate (Dong et al., 2016). Therefore, the scale of R&D institutions needed to be controlled for this study.
• Revenue: The amount of investment in R&D activities is correlated with a firm’s
revenue. The more income a firm can earn, the more a firm may spend in R&D activities (Dong et al., 2016). Consequently, revenue is a strong factor that needed to be controlled in our study.
• Private funds: In addition to receiving government subsidies for R&D activities,
firms also raise funds by themselves. Since these funds may play an important role in firms’ innovation performance, we have to control this factor in order to identify the role of government in innovation. The degree of private funds is measured as the total amount of funds raised by firms of one sector (Hong et al., 2016)
• External R&D expenditure: By investing in R&D activities, firms develop their
ability to innovate. In addition to internal investment in R&D activities, firms often collaborate with external entities, such as universities, R&D centers, etc. in order to increase the abilities and efficiency of innovation. Therefore, external R&D expenditure has a strong impact on innovation performance (Beneito, Barrachina, and
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Llopis, 2007) and is necessary to be controlled in our study.
In summary, Table 4 shows the measurement of each variable used in this study. By applying those variables, our study investigates that whether there exists an evident relationship between state ownership structure of firms and their innovation performance, and by adding two moderators, we also aim to find out the influence of external environment on this relationship and to provide a macro level perspective of China’s innovation driving force and its relationship with exogenous environment.
Table 4. Summary of the variables used and their measurement.
Variables Measurement
Dependent
Innovation performance The number of domestic patent applications Independent
State ownership structure State owned or private owned, (0,1) dummy variable used in models
Moderating
Government intervention The amount of government funds
Market competition intensity The total number of companies in one sector Control
R&D institutions The total number of R&D institutions in one sector Revenue The amount of annual income from principal business Private funds The amount of self-raised funds by enterprises External R&D expenditure The amount of expenses paid to an entrusted entity for
|Thesis H. Chen 28 5. Results
In this chapter, the results of the data analyses are discussed. First, the analytical strategy is explained. Then, the descriptive statistics of the sample and a correlation matrix of the different variables are displayed, with significant correlations highlighted. Finally, the results of testing the three hypotheses by using linear regression are given.
5.1 Analytical strategy, descriptive statistics and correlation
In this research, only secondary data was used. Because of the origin of the data, reliability checks were not necessary. First, we checked all data variables for normality. For the independent variable, State ownership structure was measured as a categorical variable, we therefore used a dummy variable to define it. The value of 0 stands for private ownership and the value of 1 for state ownership. Regarding the dependent variable, Innovation performance was measured as the number of domestic patent applications, we observed 41 missing data. Therefore, we deleted the missing dependent variable data and performed Missing Values Analysis. Since the results do not indicate significant analytical influence, we therefore use the mean values to replace the missing data.
As the final preliminary step, new variables as a function of existing variables were created for hypothesis testing. We calculated the mean of all items that was used to describe a variable. In order to get a first taste in testing hypothesis 1: A positive
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relationship exists between state ownership structure and innovation performance, a correlation analysis was done and a correlation matrix was made for all variables. This correlation matrix and the accompanying means and standard deviations of for the dependent, independent, moderating and control variables are presented in Table 5.
Table 5. Means, Standard Deviations and Correlations
Variables Mean Std. D 1 2 3 4 5 6 7 8
1. State ownership structure 0.42 0.49 -
2. Innovation performance 4,180.58 8,926.21 -.363** -
3. Market competition intensity 811.00 1,540.75 -.365** .791** -
4. R&D institutions 257.66 519.30 -.366** .834** .924** -
5. Government funds 18.71 1.99 -.481** .487** .437** .451** -
6. Private funds 20.89 1.98 -.653** .621** .569** .569** .844** -
7. External R&D expenditure 17.47 4.44 -.536** .380** .362** .369** .641** .730** -
8. Revenue 25.23 2.08 -.207** .415** .457** .436** .376** .514** .338** -
**. Correlation is significant at the 0.01 level (2-tailed).
It can be seen that correlation is observed between all variables, significantly (P-value < 0.01). However, state ownership structure is negatively correlated with innovation performance with r = -.363, significantly, which may therefore be contrary
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to hypothesis 1: A positive relationship exists between state ownership and innovation performance.
From table 5 it shows that government funds are positively correlated (r = ,487) with firms’ innovation performance, indicating that firms receiving more government funds may generate more innovation outputs. It can be also found that the correlation between market competition intensity and innovation performance of a firm is positively and significantly correlated (r = ,791). This may indicate that the degree of market competition may play a significant role in promoting firms’ innovation outputs. Innovation performance is also positively and significantly correlated with other expenditures. For example, private funds (r = ,621), external R&D expenditure (r = ,380), and revenue (r = ,415), which may suggest that the more expenditures, other than government funds, on innovation activities, the more outputs the firm will generate. Other significant result is found positive when correlating innovation performance with R&D institution (r = ,834), since, in general, the more R&D institutions, the more dynamic the innovation activities are, and thereby the more innovation outputs a firm may generate. Therefore, this may indicate that they are appropriate control variables. Because of this, hierarchical regression will have to be performed to further test the moderating effects of hypothesis 2 and 3.
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5.2 Hypothesis testing with hierarchical multiple regression
In order to be consistent with the majority of previous studies (Jones, 1998; Hu & Mathews, 2005; Hong et al., 2015; Hong et al., 2016), a log–log specification is adopted in this study. The variables, except for the independent variable, dependent variable, moderating variable (market competition intensity) and control variable (R&D institution) are expressed in logarithm form. This strategy is designed to make the estimation less sensitive to outliers and allow the easy interpretation of the estimated coefficients (Hong et al., 2015; Hong et al., 2016). To test the three hypotheses, we perform hierarchical multiple regression to investigate the direct effects of state ownership structure on innovation performance, and the size of the impact of the moderating effects of government funds and market competition intensity, after controlling for R&D institutions, private funds, revenue and external R&D expenditure. Table 6 presents the steps to perform the hierarchical multiple regression. In the first model of regression, four control variables were entered: R&D institutions, private funds, revenue and external R&D expenditure. This model was statistically significant F = 189.776; p < .001 and explained 72.7 % of variance in innovation performance. After adding two moderating variables: government funds and market competition intensity in Model 2, the total variance explained by the model as a whole remains 72.7% F = 126.434; p < .001. The introduction of state ownership structure explained additional 0.3% variance in innovation performance, after controlling for R&D
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institutions, private funds, revenue, external R&D expenditure, government funds and market competition intensity (R² Change = 0.003; F = 109.666; p < .001). The results of Model 3 indicate that our first hypothesis, stating that a positive relationship exists between state ownership structure and innovation performance, is significant at 10% level (β = 0.076, p < 0.10). In the next model, we test the moderation hypotheses. We first test the moderating role of government funds. The results of Model 4 suggest that hypothesis 2 is confirmed, as the coefficient of the interaction between state ownership structure and government funds together displays a significant but negative influence on firms’ innovation performance (β = -0.090, p < 0.05). This result can be explained as following. Under the condition of receiving government funds, if a firm is state owned, the innovation performance will decrease by -0.09. Then, we move to test the moderating effects of market competition intensity. The moderation results presented in Model 5 indicate that hypothesis 3 is also confirmed, since the interaction between market competition intensity and state ownership structure suggests a significant but still negative effect on firms’ innovation performance (β = -0.072, p < 0.10). In other words, with the same degree of market competition intensity, if a firm is state owned, its innovation performance will decrease by -0.072.
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Table 6. Hierarchical multiple regression results
Note: A natural logarithm; † p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001.
6. Discussion
6.1 State ownership structure, innovation performance and the moderating effects
State ownership structure, government intervention and market competition intensity have different impacts on the promotion of innovation. Our research indicates that state ownership structure presents a significant positive effect on promoting innovation. However, this relationship is negatively moderated by government funds and the degree of market competition intensity. Our results confirm the findings by Fan and Hope (2012), Fu et al. (2008), and Zhao and Lan (2015) that China’s SOEs have Model 1: Model 2: Model 3: Model 4: Model 5: Patents Patents Patents Patents Patents R&D insitutions 0.708*** 0.651*** 0.652*** 0.631*** 0.626*** External R&D expenditure -0.087* -0.083† -0.073 -0.072 -0.066
Revenue -0.013 -0.019 -0.034 -0.029 -0.023
Private funds 0.288*** 0.325*** 0.392*** 0.397*** 0.414***
Government funds 0.064 0.066 0.068 0.079
Market competition intensity -0.047 -0.070 -0.023 -0.072
Main effect
State ownership structure 0.076† 0.142** 0.134*
Moderating effects
State ownership structure x
Government funds -0.090*
State ownership structure x
Market competition intensity -0.072†
R² 0.731 0.733 0.736 0.740 0.738
Adj. R² 0.727 0.727 0.729 0.732 0.731
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advantages in promoting innovation. This study shows that receiving government funds may not necessarily maintain SOEs’ superiority and non-SOEs may outperform SOEs in highly competitive markets.
In this study, we explored the important role of state ownership structure in promoting firms’ innovation performance. In contrast to non-SOEs, China’s SOEs are superior in resources for innovation, and should thereby pay more attention to leverage those resources in order to promote innovation capabilities. However, it is noticeable that the existing agency problem caused by the separation of ownership and control in SOEs may induce productive efficiency losses and innovative efficiency loss due to the lack of supervision and incentive mechanism and accountability (Wu, 2012). In consequence, this problem may be amplified particularly in SOEs when utilizing government grants. This is because that China’s SOEs often use government subsidies to make up for the deficit rather than invest in R&D activities, thus receiving excessive government grants may not necessarily foster more incentives for SOEs to innovate and may rather reduce the amount of self investment in R&D (Liang et al., 2012). On the other hand, receiving government funds can alleviate non-SOEs from financial pressure and thereby encourage their innovation capabilities. In addition, China’s SOEs are administered by the government and have financial channels, for instance the state-owned banks to raise funds (Luo, Zhao, and Wang, 2011). As a result, China’s SOEs are less willing to use the receipt of government grants as a signal of government
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support to the public. On the contrary, non-SOEs often present high level of willingness to amplify the positive effects of the signal of government endorsement in order to raise more funds or obtain resources for R&D investment from outside investors (Choi, Lee, and Williams, 2011). Therefore, the government should strengthen its supervision and management of R&D subsidies, and prevent the crowding out effects of government subsidies (Hong et al., 2016).
Apart from that, it is also noteworthy that redundancy problem may be even more manifest in China’s SOEs, which thereby hinders their competitiveness, in particular, in competitive markets. This is because competitive markets are often volatile and thus require fast, flexible and accurate responses to market changes. For instance, redundant resources may reduce SOEs’ incentives to increase their market power by means of innovation, and complex organization structure and labor composition may lower the flexibility in the process of innovation. In consequence, it may take much longer or be even more difficult for China’s SOEs to develop innovative service and products in order to attract new customers in competitive markets, and tend to depend more on government’s intervention to fix market failures.
Concluding, this study did not provide an exact answer to the main research question that was proposed. However, it did find that China’s SOEs in contrast to conventional thoughts, have positive advantages in generating technological innovation outcomes. But this relationship is negatively moderated by government intervention
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and competitive market situations.
6.2 Implications
Technological innovation is the core force of a country's economic development and the improvement of national competitiveness. As a representative of the national interests, the government has inevitable responsibilities and obligations to promote technological innovation activities. It is of great importance to know that technological innovation has the characteristics of externalities, but cannot be easily solved by perfect market competition mechanism and the price mechanism, and thereby requires government intervention (Li, 2006). Specifically, technological innovation is different from the general production process. Its core is the production process of knowledge. In general, innovation outcomes include the provision in means of new products, new production process, new (raw) materials, new technology and a new structure of organization. It is crucial to know that technological innovation inevitably produce spillover effects, which may hinder technological innovation in return (Li, 2006). This is because technological innovation often requires substantial and constant investment into R&D activities. Due to the lack of financial support, most of the enterprises tend to wait for the emergence of new technology and copy the technology available on the markets rather than create new one, because this approach is less time consuming and cost saving. Therefore, it is necessary for the government to intervene as a "third party”
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in terms of reallocation of resources and financial grants, otherwise technological innovation will reach an impasse.
This study helps the government to understand the external environment for fostering innovation, which is helpful because they should understand the markets in order to generate more innovation outputs in an efficient and effective way. For instance, the proper amount of R&D subsidies should be allocated to a market and the identification of the proper markets that should be intervened should accord with the market situation, and the selection of candidate enterprises for government funds should be based on their financial status and the characteristics of the industry. Therefore, it is necessary to redevelop the financial support strategy and apply new selection criteria in order to ensure the subsidies are utilized both efficiently and effectively. Furthermore, in terms of specific theoretical contribution, this study has some more implications. A new link is sought between between internal character and external environment. Although only partly pointing out that state ownership structure in emerging countries promotes better innovation performance, it shows that for academic literature it is continuously noteworthy to address the features of these countries combining the external environment for innovation, given the fact that they are rapidly changing in every aspect. Finally, this study adds to the current understanding of the role of state ownership structure in fostering technological innovation that has a direct effect, but is expected to be affected by various external environment.
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6.3 Limitations and future research
The results and implications are not without limitations but indicate new directions for future research.
First of all, the definition of innovation performance is too broad but too difficult to be quantified. For instance, there exists no clear criteria defining what an innovative organizational structure is, so this form of innovation is often not measurable. Moreover, not all patents can be successfully transformed into economic products, and not all products necessarily generate economic benefits. Therefore, the way to quantify innovation in this study, the domestic applications, is of its limitations, and thus can not sufficiently reflect the real innovation performance. Probably a more important extension of this paper would be to examine the relationship in the non-manufacturing sectors.
Also, due to the availability of data, this study can only provide a macro analysis of China’s technological innovation from industrial aspect. Specifically, the high-tech industries of China mainland. Therefore, this study cannot specify the internal influence of the variance in firm specific advantages and entrepreneurial leadership, and the external variance in local policy for firms’ innovation activities. Because these parameters also play important roles in innovation. Additionally, this study also overlooks the innovation performed in other industries, for instance, the service industry and thus applied a biased innovation performance measurement.
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Another limitation is that some of the variables used in this study present multicollinearity issue. For example, the control variables of R&D institutions and private funds present high degree of correlation with the dependent variable patents. Besides, it is noticeable that provinces may vary in the degrees of economic reform, infrastructures and competitive policies and structures (Li, Liu, and Ren, 2007). These parameters may also have potential effects on promoting technological innovation, but are not included in this study due to lack of data.
A final limitation is that this study only performes linear regression to test the moderation effects of market competition intensity on the relationship between state ownership structure and innovation performance. But the results of some previous empirical research indicate that the relationship between competition intensity and innovation is positive but may be non-linear. For instance, Aghion et al. (2005) use the average number of patents of firms in an industry as one main parameter and price cost margin as the main indicator of product market competition to investigate the basic shape of the relationship between market competition and innovation. They find strong evidence of an inverted U-shaped relationship, in which competition may not only increase the incremental profit from innovating, but may also reduce innovation incentives for laggards. The balance between these two effects changes between low and high levels of competition, generating an inverted U-shaped relationship. This finding is also supported by Sharpe & Currie (2008), who explicitly argue that in
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industries where competition is low, innovation outputs would also be low, whereas when there are very high levels of competition, innovation performance would fall off as well.
Therefore, this study also provides various directions for future research. First, because of the multicollineartiy existing between private funds, R&D institutions and innovation performance, more extensive research should include these factors and examine their effects on promoting technological innovation. Also, future research should also try to integrate the effects of micro characteristics, such as firm advantages, FDI experience and entrepreneurial leadership. Additionally, instead of only applying linear regression, other statistical strategies, as in Aghion et al. (2005), can also be carried out and may generate much more concrete understanding of the driving force of innovation in developing countries.
7. Conclusion
The aim of this paper is to improve the previous empirical studies on the effects of state ownership structure on promoting innovation, and to provide a macro level perspective of China’s SOEs as innovation driving force with the moderating effects of exogenous environment. We test a sample of 28 sub-sectors of China’s high-tech industries, to find out the relationship between state ownership structure and innovation performance, with a proposed moderation by government intervention and market
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competition intensity. Based on an extensive literature study, this study hypothesized that state ownership structure has a positive effect on promoting firms’ innovation capabilities, but this relationship is negatively affected on condition that receiving government subsidies and operating in highly competitive markets. By performing quantitative database research, the hypotheses are tested. In the quantitative analysis, there are significant results found in trying to answer the main research questions. First, there is a significant and positive effect of state ownership structure on promoting firms’ innovation capabilities. In general, SOEs, in contrast to non-SOEs, have larger and more stable funds and resources, and thereby enjoy advantages in technological innovation, especially in strategically important industries. Second, the analysis of the moderating effects of government intervention and market competition intensity indicates that the effects of state ownership structure on promoting firms’ innovation capabilities are negatively moderated by the two exogenous parameters. Specifically, in high competitive markets, SOEs may be constrained from promoting innovation because of their redundant organizational structure and resources, and thus make slow response to market changes. In addition, SOEs may not necessarily make smart use of government subsidies as expected. This is possibly because of the dual efficiency losses caused by the agency problem, in which the separation of ownership and control often results in the flawed supervision and incentive mechanism and accountability system in SOEs.
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An additional possible extension of this paper would be to examine the inverted U-shaped relationship between market competition and innovation that is observed in the empirical research carried out by Aghion et al., (2005). Also, it would be extended to test whether this non-linear relationship equally moderates the innovation performance across different ownership structures. Furthermore, if combined with firm’s specific advantages, regional infrastructure and policies in emerging countries, this area provides a solid basis for future research. Yet, probably a more important extension of this paper would be to examine the relationship between ownership structure and innovation performance in the non-manufacturing industries.
