Local business environment and firm innovation: evidence from China

Purpose: This paper aims to investigate the influence of the regional business environment on local firm innovation, considering various dimensions such as administrative, financial and legal environments. Design/methodology/approach: Multiple regression analysis is employed to analyze archival data for firms listed on Chinese stock markets. Findings: We find that the optimizations of the administrative and financial environments positively affect firm innovation, whereas the legal environment does not exert a similar impact. Our analysis also reveals that the business environment’s optimization significantly influences innovation in firms that are small, non-state-owned and operating in high-tech industries. Furthermore, the business environment acts as a moderating variable in the relationship between firm innovation and firm value. Research limitations/implications: This study contributes to a more comprehensive understanding of institutional-level determinants of firm innovation, highlighting the nuances of the legal environment and the importance of context-specific analysis, especially in emerging markets like China. Practical implications: Developing countries can significantly enhance firm innovation by improving the business environment, including the optimization of administrative and financial systems, reducing transaction costs and ensuring capital supply. Tailored legal frameworks and alternative institutional strategies may also be explored. Social implications: This study explicitly emphasizes the governmental role in promoting firm innovation, shedding light on policy formulation and strategic alignment with local administrative policies. Originality/value: To the best of our knowledge, this paper is the first to explore the relationship between the business environment and firm innovation using World Bank indicators in an emerging market context, providing novel insights into the unique dynamics of legal, financial and administrative sub-environments.