Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?

This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms' innovation activities. The analysis is based on novel establishment survey data from The Arab Republic of Egypt which provides information...

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Main Authors:	Francis, David, Hussain, Sahar, Schiffbauer, Marc
Format:	Working Paper
Language:	English
Published:	World Bank, Washington, DC 2018
Subjects:	INNOVATION FIRM PRODUCTIVITY POLITICAL NETWORKS POLITICAL CONNECTIONS CRONYISM RESOURCE ALLOCATION
Online Access:	http://documents.worldbank.org/curated/en/914811530277806510/Do-politically-connected-firms-innovate-contributing-to-long-term-economic-growth http://hdl.handle.net/10986/29975

id	okr-10986-29975
recordtype	oai_dc
spelling	okr-10986-299752021-06-08T14:42:46Z Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth? Francis, David Hussain, Sahar Schiffbauer, Marc INNOVATION FIRM PRODUCTIVITY POLITICAL NETWORKS POLITICAL CONNECTIONS CRONYISM RESOURCE ALLOCATION This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms' innovation activities. The analysis is based on novel establishment survey data from The Arab Republic of Egypt which provides information on establishments' political connections, their innovation activities, and their access to policy privileges. The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. These privileges are largest when compared with their direct competitors operating in the same 4-digit sectors. The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce Egypt's long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms. A wide array of supporting evidence suggests that this effect is causal and not due to selection. 2018-07-13T19:18:35Z 2018-07-13T19:18:35Z 2018-06 Working Paper http://documents.worldbank.org/curated/en/914811530277806510/Do-politically-connected-firms-innovate-contributing-to-long-term-economic-growth http://hdl.handle.net/10986/29975 English Policy Research Working Paper;No. 8502 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Middle East and North Africa Egypt, Arab Republic of
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	INNOVATION FIRM PRODUCTIVITY POLITICAL NETWORKS POLITICAL CONNECTIONS CRONYISM RESOURCE ALLOCATION
spellingShingle	INNOVATION FIRM PRODUCTIVITY POLITICAL NETWORKS POLITICAL CONNECTIONS CRONYISM RESOURCE ALLOCATION Francis, David Hussain, Sahar Schiffbauer, Marc Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
geographic_facet	Middle East and North Africa Egypt, Arab Republic of
relation	Policy Research Working Paper;No. 8502
description	This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms' innovation activities. The analysis is based on novel establishment survey data from The Arab Republic of Egypt which provides information on establishments' political connections, their innovation activities, and their access to policy privileges. The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. These privileges are largest when compared with their direct competitors operating in the same 4-digit sectors. The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce Egypt's long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms. A wide array of supporting evidence suggests that this effect is causal and not due to selection.
format	Working Paper
author	Francis, David Hussain, Sahar Schiffbauer, Marc
author_facet	Francis, David Hussain, Sahar Schiffbauer, Marc
author_sort	Francis, David
title	Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
title_short	Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
title_full	Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
title_fullStr	Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
title_full_unstemmed	Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?
title_sort	do politically connected firms innovate, contributing to long-term economic growth?
publisher	World Bank, Washington, DC
publishDate	2018
url	http://documents.worldbank.org/curated/en/914811530277806510/Do-politically-connected-firms-innovate-contributing-to-long-term-economic-growth http://hdl.handle.net/10986/29975
_version_	1764470961450516480

Do Politically Connected Firms Innovate, Contributing to Long-Term Economic Growth?

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