Do government connections improve or impede small businesses' innovation?

Abstract:
Purpose
This study examines whether and how having government connections is associated with small businesses' innovation. In addition, the authors attempt to explore the moderating impacts of country-level corruption and bank market power on the association between government connections and innovation.

Design/methodology/approach
Throughout the study, we employ the probit regression technique with industry and time fixed effects on a sample of 103,883 observations from 122 countries between 2011 and 2022.

Findings
On average, firms with government connections are more likely to introduce innovative activities, whereby this positive association is robust to various tests using alternative estimation methods, different indicators and sample selection criteria. Furthermore, firms with government connections tend to invest more in R&D and have greater financial access than those without such connections. Importantly, the impact of government connections on innovative activities tends to be stronger in countries with higher bank market power.

Originality/value
This study is the first that hypothesizes and tests the potential moderating effects of country corruption and bank market power on the government connections–innovation nexus. Thus, we contribute to the literature by specifying when government connections may lead to innovation. Moreover, this study enhances the existing literature by utilizing a large, cross-country sample including small businesses, which are often overlooked. In addition, we validate the channels linking government connections and innovative activities.