Government support and cross‐border innovation: The effect of China's innovative city policy on Chinese firms' patenting in the United States

Abstract

AbstractFirms innovate their new processes and products not only within their countries but also across national boundaries. This is known as cross‐border innovation, and many countries have initiated policies to support it. But how does government support influence cross‐border innovation? Through the lens of Porter's diamond model, this study conceptualizes government support as slack resources and investigates how it affects a firm's inventive activities in an uncertain, competitive global market. This study examines Chinese firms' patent filings in the United States under the enactment of the “innovative city” policy. We apply matching and generalized difference‐in‐differences techniques to this staggered quasi‐experimental setting and find that government support stimulates firms' cross‐border innovation. We further show that firms with higher research and development capacity take better advantage of government support. Finally, we show that government support leads to a rebalancing of exploratory and exploitative innovation such that a firm that has conducted more exploration will perform more exploitation and vice versa. Taken together, this study extends our understanding of slack from internal resources to government support in the context of global operations. Findings suggest that government actions that improve the ecosystem of innovation in one country strengthen firms' innovation and competitiveness overseas.