Business entertainment, anticorruption, and innovation: evidence from China

This paper examines how business entertainment expenses (BEEs), often regarded as grease money, affect corporate innovation. Using hand-collected BEE data from Chinese listed firms’ annual reports, we construct a panel of 30,353 firm-year observations over 2010–2022. Poisson regressions show that a 0.1-percentage-point increase in BEEs relative to sales is associated with 0.46% and 0.54% increases in patent applications and grants, respectively. To identify the effects of anti-corruption enforcement on innovation, we exploit China’s 2012 anti-corruption campaign in a difference-in-differences design, comparing firms with high and low pre-campaign BEE intensity in a balanced panel of 1,075 firms covering 2010–2015. Following the campaign, patent applications and grants fall by 26% and 21%, respectively, among high-BEE firms relative to low-BEE firms. Low-BEE firms benefit from positive spillovers arising from the reallocation of government subsidies, while social trust and public scrutiny strengthen the campaign’s disciplining effect on high-BEE firms. These findings highlight the dual effects of anti-corruption enforcement on innovation: disrupting the exchange of BEEs for favours constrains innovation among corruption-dependent firms, while fairer resource allocation benefits firms that are less dependent on such exchanges.