How state ownership affects corporate R&D: An inverted-U-shaped relationship

The existing literature provides mixed evidence about the effect of state ownership on corporate research and development (R&D). As this article hypothesizes, state ownership has a positive institutional effect on the investment environment for R&D and a negative institutional effect on firm operations for innovation. With evidence from China, we confirm that state-owned shares have an inverted-U-shaped causal effect on corporate R&D and that having the state as a minority shareholder is optimal for corporate R&D. We further document that, when a firm's R&D investment at least equals reinvestment of its profit, the threshold for state-owned shares is larger than it would be otherwise. Therefore, we justify the contradictory institutional effects of state ownership with an inverted-U-shaped relationship, thereby enhancing understanding of institutions and state ownership for corporate finance.