Academic journal article Economic Inquiry

Persistence of Politicians and Firms' Innovation

Academic journal article Economic Inquiry

Persistence of Politicians and Firms' Innovation

Article excerpt

I. INTRODUCTION

In many circumstances, the coexistence of long-lived economic and political elites is blamed for countries' low rate of technological innovation and economic growth. Through long-lasting personal relations, contacts, and acquaintances ("knowing the right person in the right place"), the sociopolitical network between politicians and economic actors tends to create a stable elite that rules the country, preventing the access to power by more dynamic individuals. Although a (possibly negative) relationship between perpetuation of political and economic power and innovation is often mentioned in policy debates, neither a well-established economic theory nor a convincing empirical evidence is available to support this view.

To formally address these issues, in this article we empirically investigate whether the Italian local political environment, in particular the persistence of the same persons in the local political institutions, affects private firms' propensity to innovate. By concentrating on a single country, we avoid concerns emerging when countries with very different institutional settings are put together in cross-country analysis. Yet, information on Italian politicians is available at the local level, including municipality level, thus potentially providing substantial spatial variation in measures of persistence of politicians. Moreover, the insufficient replacement of power elite is often considered to be among the causes of Italy's economic decline. As Carboni (2007) puts it, "Italy is falling behind and the unconcern of our elites about our future is probably the consequence of the obsolescence of the country and of our circles of power ruled by a gerontocratic core" (p. 6, our translation).

We first construct a measure of political persistence in Italian municipalities, where persistence is defined as the average longevity in office of individuals appointed in local political institutions over a given period, from 1985 to 2007, the longest time span available, or a sub-period. Our measure of persistence considers the pool of politicians of a municipality as the entity with which firms interact, rather than focusing on the individual connection between a firm and a politician, as it the case in the literature about the impact of political connections on firms' economic performance (see for instance Faccio 2006). Being based on individual data on careers in (local) political institutions, our measure also differs significantly from measures that have been previously used in the literature on political stability, that typically rely on the frequency of executive change or indicators of social unrest (see, e.g., Alesina et al. 1996). We then merge these political data with socioeconomic data that include, among others, relevant information on the location and innovation activity of Italian small and medium enterprises for a total of about 12,000 observations in the period 1998-2006.

Using this detailed data set, we perform a cross-sectional analysis where the probability of process innovation is related to political persistence in the municipality where the firm is located. Owing to the fact that there may be a spurious correlation between our two main variables, we estimate the model by instrumental variables, using the unexpected death of politicians in a municipality as a source of exogenous variation in political persistence. (1)

The main result of our empirical analysis is that, when we consider process innovation, the innovation activity of firms located in a municipality is negatively affected by the average length in office of local politicians. More specifically, our instrumental variables estimates suggest that a 6-month increase in politicians' average longevity lowers the probability of process innovation by 15%, including province fixed effects and other controls at the municipality and firm level. Moreover, we find that older firms are more affected by political persistence than younger ones, and that the impact of political persistence is slightly stronger for firms that operate in industries heavily dependent on the public sector. …

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