How Can Local Policy Uncertainty Encourage Firm Innovation : A Competitive Advantage Channel

Exploring the turnovers of city heads in China, I find that local policy uncertainty can encourage firm innovation. This positive relation is concentrated in state-owned enterprises (SOEs), which possess competitive advantages (especially resource-based) due to innate government connections. Additionally, for SOEs, invention patents filed despite local policy uncertainty contribute to higher sales growth and an increase in product market shares. My findings indicate that innate government connections enable firms to mitigate local policy uncertainty and explore first-mover advantages through innovation activities