Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms' innovation activities. The analysis is based on novel establishment survey data from The Arab Republic of Egypt which provides information...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/914811530277806510/Do-politically-connected-firms-innovate-contributing-to-long-term-economic-growth http://hdl.handle.net/10986/29975 |
| Summary: | This paper presents new evidence that
cronyism reduces long-term economic growth by discouraging
firms' innovation activities. The analysis is based on
novel establishment survey data from The Arab Republic of
Egypt which provides information on establishments'
political connections, their innovation activities, and
their access to policy privileges. The analysis finds that
the probability that firms invest in products new to the
firm increases from under 1 percent for politically
connected firms to over 7 percent for unconnected firms. The
results are robust across different innovation measures.
Despite innovating less, politically connected firms are
more capital intensive, as they face lower marginal cost of
capital due to the generous policy privileges they receive,
including exclusive access to input subsidies, public
procurement contracts, favorable exchange rates, and
financing from politically connected banks. These privileges
are largest when compared with their direct competitors
operating in the same 4-digit sectors. The findings suggest
that connected firms out-rival their competitors by lobbying
for privileges instead of innovating. In the aggregate,
these policy privileges reduce Egypt's long-term growth
potential by diverting resources away from innovation to the
inefficient capital accumulation of a few large, connected
firms. A wide array of supporting evidence suggests that
this effect is causal and not due to selection. |
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