Managerial incentives, CEO characteristics and corporate innovation in China’s private sector

► The presence of CEO incentive schemes increases corporate innovation. ► Sales-based performance measures in the incentive schemes are more conductive. ► Firm innovation can be affected by CEO’s education level, professional background and political connection. We use a unique World Bank survey of 1088 private manufacturing firms from 18 Chinese cities over the period 2000–2002 to empirically examine the roles of managerial incentives and CEO characteristics in a firm’s innovation activities. We look at both innovation effort (R&D intensity) and innovation performance measures such as new product sales. We obtain the following main results: (1) the presence of CEO incentive schemes increases both corporate innovation effort and innovation performance; (2) sales-based performance measures in the incentive scheme, as compared with profit-based performance measure, are more conducive to firm innovation; and (3) CEO education level, professional background and political connection are positively associated with firm’s innovation efforts. The main results are robust to endogeneity tests with instrumental variables. We also discuss some important policy implications.