How and When Do Subnational Institutions Matter for R&D Investment? Evidence From the Chinese Pharmaceutical Sector

Drawing on new institutional economics and the innovation literature, this paper examines how subnational institutions can impact corporate research and development (R&D) investment in emerging economies. The study further investigates a key contingency of this institutional effect: a firm's country/ownership identity. Using China's pharmaceutical sector as the empirical context, we find that the quality of subnational institutions, such as the degree of government deregulation and the effectiveness of local contracting institutions, has a significantly positive impact on corporate R&D intensity. Moreover, this institutional effect is more salient in indigenous firms and international joint ventures than in wholly owned foreign subsidiaries. This study serves to shed light on future research on how multifaceted subnational institutions shape innovation activities across different types of business organizations in emerging economies.