Fault Tolerance for Corporate Innovation: Evidence from the Reform of State-owned Enterprises

Abstract

Innovation is the source of power for high-quality development, and a relaxed institutional arrangement is a necessity for promoting innovation in enterprises. This paper examines the impact of fault tolerance on corporate innovation, theoretically analyzes the positive effects of fault tolerance on stimulating innovation, and estimates the influence of fault tolerance on corporate innovation by using the panel data of listed manufacturing companies from 2007 to 2019, taking the quasi-natural experiment of fault-tolerance system in various places since the new round of state-owned enterprise (SOE) reform. This study finds that the fault-tolerance system has significantly improved the R&D investment and patent application of the pilot SOEs,but the incentive effect is mainly reflected in the utility model patents; fault-tolerance system mainly promotes corporate innovation by alleviating managers' career worries and improving governance ability.Furthermore, the fault-tolerance system is more effective for small and medium-sized SOEs with low market competition and can alleviate the restriction of agency cost on corporate innovation. In addition, the fault-tolerance system has not yet had a significant spillover effect on private enterprises.These results show that in the SOE reform, it is necessary to strengthen the institutional arrangement of fault-tolerance and create a relaxed environment to encourage innovation; it is necessary to organically integrate fault-tolerance-system design into executive measurement and corporate governance, promote fault-tolerant system to be implemented in a wider range of enterprises, and enhance the incentive effect on high-quality innovation.

Keywords

fault tolerance / corporate innovation / incentive mechanism / state-owned enterprise reform / quasi-natural experiment

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