The Effects of Corporate Governance and Ownership on the Innovation Performance of Chinese SMEs∗

Abstract: We investigate the degree to which corporate governance and ownership affect the innovation performance of firms in China with a particular focus on privately owned small and medium enterprises (SMEs). Using the appropriate theoretical frameworks, we derive hypotheses regarding the impact of ownership concentration, board size and composition, and the background of the CEO on innovative activity. These hypotheses are tested using a unique sample of 370 mostly private and relatively small Chinese firms in Zhejiang province, for the period 2004 to 2006. Using two measures of innovation, invention patents and new product sales, and a variety of estimation methods appropriate to each measure, we find limited evidence that corporate governance affects innovation performance, but the results do depend on the measure of innovation. In general, the results suggest that for this sample, corporate governance and ownership affect innovation activity more strongly when innovation is measured by patenting activity, rather than new product sales. We conclude with a discussion as to why this might be. JEL classification: M1, M2, O3