Curvilinear effect of economic policy uncertainty on innovation in Chinese manufacturing firms: do managerial pay gaps matter?
ISSN: 1750-614X
Article publication date: 26 May 2022
Issue publication date: 22 June 2023
Abstract
Purpose
This study aims to re-examine the impact of economic policy uncertainty (EPU) on firm innovation. Studies on how EPU affects firm innovation have been inconclusive. The authors clarified the curvilinear relationship between EPU and firm innovation and examined the moderating effects of managerial pay gaps, specifically vertical pay disparity and horizontal pay dispersion.
Design/methodology/approach
This study’s analyses used data collected from Chinese listed companies from 2007 to 2019.
Findings
The authors found an inverted U-shaped relationship between EPU and firm innovation. Furthermore, vertical pay disparity strengthens the curvilinear relationship, while horizontal pay dispersion weakens it.
Practical implications
First, politicians should avoid adjusting economic policies too frequently because the high EPU levels created by frequent adjustments can inhibit business innovation. Second, firms should be aware that EPU creates opportunities for leapfrogging. In particular, firms can incentivize executives to take advantage of the valuable growth opportunities presented by EPU by widening vertical pay disparities and avoiding excessive horizontal pay dispersion.
Originality/value
First, the authors analyze not only the positive effects of lower EPU on firm innovation but also the negative impacts of higher EPU to examine EPU’s “double-edged sword” effect on firm innovation. Second, the investigation of vertical pay disparity and horizontal pay dispersion as moderating variables sheds new light on the equivocal research findings regarding the EPU–firm innovation relationship and clarifies the boundary conditions of the double-edged sword effect of EPU on firm innovation.
Keywords
Acknowledgements
The authors are grateful to the financial support from the Guangdong Basic and Applied Basic Research Foundation (2021A1515110864).
Citation
Zhong, X., Chen, W. and Ren, G. (2023), "Curvilinear effect of economic policy uncertainty on innovation in Chinese manufacturing firms: do managerial pay gaps matter?", Chinese Management Studies, Vol. 17 No. 4, pp. 701-717. https://doi.org/10.1108/CMS-06-2021-0244
Publisher
:Emerald Publishing Limited
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