Market-based reforms, synchronization and product innovation

• Market-based reforms positively affect firms’ innovation performance.
• The synchronization of different dimensions of market-based reforms positively affects firms’ innovation performance.
• Firms’ absorptive capacity positively moderates the relationships between market-based reforms and innovation performance.
• Firms’ absorptive capacity positively moderates the relationships between the synchronization of market-based reforms and innovation performance.

This paper focuses on the multiple dimensions of market-based reforms and their impacts on firms’ product innovation performance in China, the largest emerging country in the world. By analyzing a data set with more than one-half-million observations on firms during China's economic transition during the period 2005–2007, we find that the progress of market-based reforms and the degree to which different dimensions of market-based reforms are conducted simultaneously, referred to as synchronization, have a positive effect on firms’ product innovation. We also find that firms with higher absorptive capacity benefit more from market-based reforms and the synchronization of different dimensions of market-based reforms.