Does the expansion of Chinese state-owned enterprises affect the innovative behavior of private enterprises?

State-owned enterprises (SOEs) have expanded rapidly in China since 2003. Through an empirical study using Chinese Industrial Enterprises Database and Patent Application Database from 2004 to 2007, we found that the expansion of SOEs negatively affected the innovation of private enterprises. Chinese private enterprises usually do not have extensive assets or strong ability to obtain debt financing, and thus are less likely to maintain investments in R&D when SOEs expand. Considering private enterprises are the main contributors of innovation in China, it is important to note the negative effect of the expansion of SOEs on the innovation of private enterprises. We further distinguished the SOEs along two dimensions: holding type and affiliation type. Based on the first dimension, we divided the SOEs into absolutely controlled SOEs and relatively controlled SOEs (RSOEs); based on the second dimension, we divided the SOEs into those belonging to higher level governments (central or provincial) (HSOEs) and those belonging to lower level governments such as municipal governments (LSOEs). We found that only RSOEs and LSOEs expanded rapidly from 2004 to 2007, and that it is the expansion of RSOEs and LSOEs that led to a decrease in innovation of private enterprises. Moreover, we found that the expansion of SOEs increased the average interest rate faced by private enterprises and that the increase in average interest rate was the primary reason for the decrease in innovation of private enterprises.