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Policy instrument mix, financial slack, and firm innovation performance: Evidence from China's photovoltaic industry

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  • Guo, Jingjing
  • Wang, Yueqi
  • Chen, Jin

Abstract

Given innovation sparks numerous uncertainties, risks and failures among industrial firms, a deliberately designed industrial policy instrument mix has been deemed more appropriate than a single instrument to address these issues. However, prior literature lacks sufficient investigation to firm-level innovation implications of instrument mix. Drawing upon the institution-based view, we establish the nexus between instrument mix (in terms of intensity and diversity, respectively) and firm innovation performance: instrument mix not only support firms' innovation activities via the institution-fostering mechanism, but also delivers certain pressure and control through the institution-constraining mechanism. Integrating these two opposite mechanisms, we propose that both instrument mix intensity and diversity have an inverse U-shaped relationship with firm innovation performance. Moreover, such curvilinear relationship, we postulate, is contingent on financial slack as target firms’ characteristic. Using archival data on listed firms in Chinese photovoltaic industry from 2012 to 2017 and relevant national policy documents between 2010 and 2017, we find an inverted U-shaped relationship between instrument mix diversity and firm innovation performance. By contrast, the nonlinear influence of instrument mix intensity is significant only when financial slack is considered and being attenuated. Overall, our work contributes to extending the policy mix literature in the context of emerging economies.

Suggested Citation

  • Guo, Jingjing & Wang, Yueqi & Chen, Jin, 2025. "Policy instrument mix, financial slack, and firm innovation performance: Evidence from China's photovoltaic industry," Technovation, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:techno:v:141:y:2025:i:c:s0166497225000069
    DOI: 10.1016/j.technovation.2025.103174
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