Legal environment, government effectiveness and firms' innovation in China: Examining the moderating influence of government ownership

• This study analyzes the behavior of Chinese firms to find out governance factors in innovation activities of these firms.
• Local legal environment has had a significantly positive effect on a firm's innovation.
• Government effectiveness has also had a significantly positive effect on a firm's innovation.
• Government ownership has different kind of moderation effect on these relationships.

Using the World Bank's data in China, we analyzed the behavior of Chinese firms to find out governance factors in innovation activities of these firms. The results suggest that in China, an emerging economy in Northeast Asia, the local legal environment has had a significantly positive effect on firms' product innovation, technological innovation, process innovation and management innovation. Government ownership positively moderates the relationship between the local legal environment and technological innovation. However, government ownership negatively moderates the relationship between the local legal environment and management innovation. Moreover, government effectiveness has also had a significantly positive effect on a firm's product innovation, technological innovation, process innovation and management innovation. In addition, government ownership negatively moderates the relationship between government effectiveness and management innovation. This study offers fresh insight on the role of governance factors of legal environment, government effectiveness and ownership in firms' innovation activities.