Bureaucratic Culture and Innovation

• Published date: 01 May 2024
• Author: Shigang Li,Kexin She,Li Zhang
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/cwe.12531

©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 31–66, Vol. 32, No. 3, 2024 31

*Shigang Li, Associate Professor, International School of Business and Finance, Sun Yat-sen University,

China. Email: lishigang@mail.sysu.edu.cn; Kexin She, PhD Candidate, National School of Development,

Peking University, China. Email: kxshe2020@nsd.pku.edu.cn; Li Zhang, Professor, International School of

Business and Finance, Key Laboratory of Mesoeconomics and Coordinated Development of Regions and

Industries, Sun Yat-sen University, China. Email: zhangL39@mail.sysu.edu.cn. The authors are grateful

for support from the National Social Science Foundation of China (No. 22&ZD062), the National Natural

Science Foundation of China (Nos. 72373168 and 71973158), the Research Program of Humanities and Social

Sciences of the Ministry of Education of China (No. 18YJC790089), and the Social Science Foundation of

Guangdong province (No. GD22TWCXGC04).

Bureaucratic Culture and Innovation

Shigang Li, Kexin She, Li Zhang*

Abstract

This study explores the effects of bureaucratic culture on innovation. We define

bureaucratic culture as a culture in which power and officials are held in the highest

regard. Using panel data of publicly listed Chinese manufacturing firms from 2007 to

2015, we found that bureaucratic culture negatively correlated with firms’ patent output.

A mechanism analysis shows that bureaucratic culture hindered corporate innovation by

reducing firms’ research and development inputs and decreasing innovation efficiency.

F urthermore, we provided evidence that anti-corruption campaigns and the development

of formal institutions could neutralize the negative impact of bureaucratic culture on

corporate innovation. This study is the first to investigate quantitatively the causal effect

of bureaucratic culture on corporate innovation and it can deepen the understanding of

the relationship between culture and innovation in China. We speculate that promoting

a creative culture, particularly one that fosters entrepreneurial spirit, is of utmost

importance.

K eywords: bureaucratic culture, corporate innovation, economic growth, talent

allocation

JEL codes: L25, O31, Z1

I. Introduction

Innovation plays a vital role in economic development. Consequently, previous research

has focused on the factors influencing it. Recently, the connection between culture and

innovation has led to a growing literature stream extending to many cultural contexts

such as religion, Confucianism, and individualism, illustrating the prevalent influence

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©2024 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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of culture on innovation (J ones and Davis, 2000; Chen et al., 2014; Xu and Li, 2019).

In this study, we investigate the impact of bureaucratic culture on innovation in China, the

world’s largest developing economy and the source of much of the world’s innovation.

We define bureaucratic culture as a culture in which power and officials are held in

the highest regard. This is characterized by the widespread social belief that working

for the government is the key to a respected and fulfilling life; consequently, civil-

service jobs are preferred occupations.1 This contrasts with most developed countries,

where labor market opportunities and occupational preferences may differ considerably.

Burea ucratic culture has existed in China for thousands of years (Ho, 2008) and has

d eveloped traits that emphasize compliance with authority and risk avoidance.

Burea ucratic culture has h ad a profound impact on China’s social and economic

development. For example, Lin (1995) argued that the incentives created by bureaucratic

culture explained the Needham Puzzle (Needham, 1986), which questioned why the

Industrial Revolution did not originate in China. Althou gh Chinese economic reforms

have, on average, provided many opportunities outside governmental structures in recent

decades, talented Chinese workers continue to flood the public sector. Of course, human

capital in the government can lead to higher quality public services, possibly improving

the environment and the efficiency of private-sector innovation. However, given a

society’s total human capital, there is an optimal level of talent allocation between the

public and private sectors. Li and Yin (2017) found that China allocated too much human

capital to the government, which was wasteful and possibly even harmful. Furthermore,

the public sector was relatively nonproductive in comparison with the private sector

(Lai and Ji, 2015; Li and Nan, 2019). The rel evant literature indicates that talent enters

nonproductive sectors in response to rent seeking, which could impede economic

growth (Baumol, 1990; Murphy et al., 1991). China is potentially an exception, as its

rapid economic growth has coexisted, since the late 1970s, with substantial numbers

of highly educated workers crowding into the relatively nonproductive government

sector.2 Conversely, some economists believe that this has been key to China’s economic

success (Li and Zhou, 2003; Wang and Xu, 2008; Yao and Zhang, 2015). Given these

conflicting results, this study focuses on corporate innovation in China by asking whether

1China’s Economic Growth Frontier Research (2014) found that, in China, the education level of employees

in industries and sectors with low levels of marketization is very high – even close to the level in developed

countries. However, in industries and sectors with a high level of marketization, the education level of human

capital is very low.

2According to the 1 percent National Population Survey (NPSS) of 2015, the average public sector employee

in China had 13.77 years of formal education, which was 3.32 more years of education than that in the private

sector. The gap in 2005 was 3.55 years. Although the gap narrowed compared to 10 years ago, the decline was

very small and the gap remained large.

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Bureaucratic Culture and Innovation 33

bureaucratic culture aids or hinders economic performance. Answering this question

could improve our understanding of China’s rapid economic progress and provide

guidelines for other developing countries.

The literature suggests that the sign of bureaucratic culture’s impact on corporate

innovation is uncertain. Bureaucratic culture rewards those who conform to the preferences

of authorities and drives people to avoid uncertainties. This is because officials pursue

promotions and thus mainly focus on short-term tasks that can be completed effectively

with little risk. These characteristics are strongly correlated with Hofstede’s (2001)

cultural dimensions of uncertainty avoidance and power distance tolerance.3 Uncertainty

avoidance hinders innovation because innovation requires tolerance of risk and change

(Shane, 1993). Conventional wisdom also argues that tolerance of power distance, which

emphasizes hierarchy, is harmful to innovation because it encourages conformity and

discourages individuals from standing out (Hofstede, 1980; Shane, 1992). Bureaucratic

culture may therefore impede corporate innovation.

However, in bureaucratic culture-influenced societies, talent and human capital

prefer to work in the government. Several researchers posit that government officials

are essential for local economic growth. Li and Zhou (2003) and Xu (2011) provide

evidence that local officials were rewarded or punished based on the economic

performance of their administrative domains and that this incentive structure has

driven China’s recent remarkable economic growth. Several other studies have found

that the abilities of local officials have had a significant impact on local economies

(Wang and Xu, 2008; Yao and Zhang, 2015). Thus, a government capable of attracting

talented and competent officials will be better able to provide the infrastructure and

environment required for innovation. Consequently, bureaucratic culture might promote

corporate innovation.

We need to o vercome two major challenges to identify the causal effect of

bureaucratic culture on innovation. First, bureaucratic culture is abstract and difficult

to measure. Numerous studies, mostly written in Chinese, have discussed bureaucratic

culture but few have taken a quantitative approach. In this study, we used the relative

allocation of talent between the public and private sectors as a proxy for the influence

of bureaucratic culture. With all els e being equal, a stronger bureaucratic culture would

attract more talented individuals to public service. We used the ratio of average years of

education for public and private sector employees across China as an index measure of

local bureaucratic culture influence.

3Uncertainty avoidance represents discomfort with unstructured or ambiguous situations and preference for

certainty. Tolerance of power distance represents the acceptance of inequality in power and authority levels

between people (Hofstede, 2001).