Social trust and firm innovation: Evidence from China

This study investigates the impact of social trust on firm innovation. Using a large sample of A-share listed firms in China from 2002 to 2017, we find that firms headquartered in regions of high social trust tend to have better innovation performance than those in regions with low social trust. In analyzing the mechanisms, we find that the positive impact of trust on innovation is more pronounced in firms where managers face greater career risk, in firms in less financially developed regions, and in firms in regions with weaker legal institutions. In additional analyses, we find that the anti-corruption campaign launched in 2012 reduces the impact of social trust on innovation and that difference in the levels of trust between where the firm locates and where the CEO comes from has an additional effect on innovation, which indicate the roles of institutional quality and cultural difference. Our results are robust to alternative social trust and innovation measures and different estimation methods and after correcting for endogeneity by employing an IV approach.