Study on the Impact of Breakthrough and Incremental Innovation on Firm Capacity Utilization

Abstract

Effectively resolving manufacturing overcapacity is an important way for China to stimulate economic vitality and achieve high-quality economic development. Although research on technological innovation to resolve overcapacity has attracted academic attention, less research has been conducted from the perspective of innovation intensity. This paper uses the panel data of 1447 A-share listed companies in China’s manufacturing industry from 2016 to 2020, based on a two-way fixed effects model. The paper divides technological innovation into two dimensions to explore the impact of breakthrough innovation and incremental innovation on enterprises’ capacity utilization. The results show that both breakthrough and incremental innovations can effectively improve the capacity utilization of enterprises; however, the breakthrough innovation has a greater degree of improvement. The moderating effect shows that a good institutional environment strengthens the positive relationship between breakthrough innovations and the capacity utilization of enterprises. The heterogeneity analysis finds that breakthrough and incremental innovations have a stronger effect on the capacity utilization of state-owned enterprises. This paper further improves the theoretical framework of the relationship between technological innovation and enterprise capacity utilization and provides a theoretical basis and motivation for the Chinese manufacturing industry to resolve overcapacity and respond to the national requirements for high-quality development.

1. Introduction

In the context that China has now entered the stage of high-quality development, the manufacturing industry, as the backbone of the national economy, is an important support for the high-quality development of China. However, under the influence of the previous crude development model, the manufacturing industry of China has long been located in the middle and low end of the global value chain. The lack of core technology and insufficient independent innovation capacity has made it nearly impossible to match manufacturing supply with upgraded demand, leading to the emergence of structural overcapacity in the form of excess capacity at the middle and lower ends and insufficient supply of high-end capacity, manifesting itself in the manufacturing capacity utilization that has been below the reasonable range of 79–83% by European and American standards for nearly 10 years (data from China Statistics Bureau). In 2015, the Central Leading Group of Finance and Economics of China proposed supply-side structural reform, aiming to adjust the industrial structure and improve the quality and efficiency of economic growth. In the process of promoting supply-side structural reform to resolve structural overcapacity in the manufacturing sector, it is necessary to realize the significant role of technological progress and technological innovation [1]. In addition, the current implementation of China’s innovation-driven development strategy requires more awareness of the important role of technological innovation in driving the optimization of industrial structure, promoting industrial transformation and upgrading and transforming the economic development mode. Based on the above background, this paper divides technological innovation into breakthrough and incremental innovation and explores in depth the impact of technological innovation on the capacity utilization of manufacturing enterprises. The research of this paper further improves the theoretical framework of the relationship between technological innovation and enterprise capacity utilization, which is conducive to resolving the structural overcapacity of the manufacturing industry of China, and thus realizing the goal of high-quality economic development in China.

2. Literature Review

Western scholars and Chinese scholars have different research emphases on enterprise capacity construction and utilization. While Western scholars have mainly explained the problem of overcapacity construction from the perspective of macroeconomic cycle fluctuations and the strategic behavior of firms to defend themselves against potential competitors, Chinese scholars have focused more on the problem of overcapacity and underutilization of capacity in China from the perspective of the country’s development stage and special institutional environment. The former has concentrated on the impact of market factors, while the latter has focused on non-market factors based on the realities in China.

In the context of macroeconomic cycles, firms choose to actively maintain a certain amount of excess capacity for reasons such as smoothing demand fluctuations and reducing production costs, while they passively retain a certain amount of excess capacity due to the specificity of their assets. When the macroeconomy is booming, firms will invest more, and when the boom dissipates into a recession, firms will not immediately dispose of their idle capacity [2]. According to the theory of smooth demand fluctuation, the capacity decision of enterprises is an intertemporal dynamic behavior, and there is great uncertainty in economic life. In order to cope with the sudden growth of market demand in the future, enterprises will choose to maintain a certain amount of excess capacity [3,4]. Stiglitz (1999) argued that adjusting capacity at any time according to demand fluctuations requires a large adjustment cost, and the storage cost for storing this part of capacity in the short term is far lower than the adjustment cost, so it is a more rational business decision for enterprises to store this part of capacity [5]. Pindyck (1986) described the micro-mechanism of a firm’s passive retention of a certain amount of excess capacity; due to the irreversibility of investment and the specialized nature of assets, firms have no way of disposing of this capacity when demand falls, that is, enterprises face large exit barriers due to the specialized nature of production factors and are therefore forced to passively retain excess capacity [4]. In addition, the strategic behavior of firms to defend themselves against potential competitors may also lead to excess capacity. On the one hand, in a monopolistic competition market, where the timing of the entry of new competitors and the impact of that entry on their own market share are unknown, firms’ capacity adjustments do not match the actual market demand they face, leading to a situation of overcapacity [6,7]. On the other hand, under oligopolistic market conditions, incumbents tend to adopt predatory behaviors in order to ward off potential competitors, creating an excess capacity in the market through capacity expansion strategies and thus sending credible deterrent signals to potential entrants [8,9].

As China is still in the period of economic transition, the market operation mechanism is not mature, and domestic scholars are more focused on China’s development stage and special institutional environment and other non-market factors in studying the phenomenon of overcapacity unique to China, and the main views can be divided into the “development stage theory” and the “institutional environment theory”. The “development stage theory “, which focuses on the dynamic development of the economy, believes that enterprises in developing countries are prone to consensus on promising industries in the future, and due to incomplete information, enterprises do not have enough information on the total investment volume and are prone to “surge” in investment, which leads to the formation of overcapacity [10,11]. Alternatively, it may be argued that in the early stages of the industry, market demand faces greater uncertainty and high-efficiency enterprises will invest cautiously to avoid risks, thus leaving market space for inefficient enterprises. This leads to the underutilization of capacity due to the low market concentration rate [12]. The “institutional environment theory”, based on the fact that China is still at the stage of economic transition, suggests that local governments have the incentive to intervene in the investment and production behavior of local enterprises due to both financial interests and political promotion, leading to duplication and overcapacity [13,14]. In order to promote local economic growth during their tenure, government departments provide land to enterprises at low prices to increase their investment and production, while in order to better assist enterprises in their investment, local governments also coordinate matching loans for enterprises and connive at their pollution emissions, which significantly externalizes their risk and production costs. The combined effect of these factors makes the private investment costs of enterprises less than the social costs, leading to over-investment and overcapacity. In addition, inappropriate government intervention is also evident in the formation of market segmentation and in preventing the exit of excess capacity. Local governments may erect barriers to entry for foreign enterprises in order to maintain or expand local gains. The market segmentation brought about by local protectionism inhibits the free flow of factors between regions, which is detrimental to industrial integration and regional specialization and leads to low levels of capacity utilization [15]. State-owned enterprises (SOEs) tend to have the distinctive characteristics of heavy fixed assets and a large number of employees. When attempting to exit the market due to poor business performance, SOEs face constraints not only from their production factors but also from local government control. In order to stabilize employment, government departments often provide policy subsidies to poorly-run SOEs, forcing them to remain in the industries. Yang (2013) similarly pointed out that SOEs face greater exit barriers in the exit process due to their special characteristics, which carry more social responsibility [16].

In recent years, Western scholars’ research on enterprise capacity construction and its utilization rate has declined, while domestic scholars have gradually shifted the focus of their research from exploring the causes of overcapacity to resolving China’s overcapacity when discussing China’s particular overcapacity problem. Since overcapacity at the industry level is basically reflected by enterprise capacity, scholars have focused their research on improving enterprise capacity utilization. Specifically, Chinese scholars discuss three areas: import and export trade; foreign direct investment; and technological innovation.

The impact of export trade on firms’ capacity utilization can be categorized into direct and indirect effects. The direct effect refers to the fact that export trade helps enterprises to expand overseas markets and effectively drives the consumption of excess capacity [17]; the indirect effect consists of two aspects, one, under export trade, enterprises face stricter consumers, in order to meet the higher product quality preferences of foreign consumers, enterprises need to improve the technical content and quality level of their products. As a result, it leads to greater market competitiveness of enterprises’ products and a decrease in capacity idleness. Second, export trade makes enterprises face more fierce market competition, and in order to gain a foothold in the market, enterprises have to improve their productivity and reduce production costs, and there is a positive relationship between productivity improvement and capacity utilization [18]. The positive effect of import trade on capacity utilization is more focused on the impact of technology spillover effects of imported products on improving the quality of firms’ products [19]. The impact of FDI on firms’ capacity utilization is broadly similar to that of export trade, but in addition to the direct and indirect benefits, FDI also has a production transfer effect. Transferring a firm’s marginal production line to less developed regions, not only directly eliminates backward production capacity but also releases the production factors occupied by the marginal production line, improving the firm’s resource allocation efficiency and alleviating overcapacity [20]. Compared with export and import trade and foreign direct investment, the impact of technological innovation on firms’ capacity utilization is more intuitive on the production and supply side. On the production side, technological innovation can bring about improvements in production methods and processes, resulting in higher production performance, lower production costs, and higher production efficiency, thus positively contributing to capacity utilization [21]. On the supply side, technological innovation promotes the upgrading of enterprises’ products and services, and enhances their core competition. By implementing differentiation strategies through innovation, enterprises can attract customers and gain customer recognition, which in turn drives up market share and capacity utilization [22]. However, some other scholars hold the opposite view on the impact of technological innovation on capacity utilization. Since technological progress is not always Hicks-neutral, when it favors capital, the rapid expansion of the capital factor can catalyze the formation of excess capacity [23]. Further, the “inverse factor endowment structure” bias of technological progress can also cause problems such as insufficient domestic demand and loss of technical efficiency [24].

In the field of capacity building and utilization, the focus of research has shifted from finding the causes of overcapacity to resolving it and improving enterprises’ capacity utilization. Technological innovation is an important source of motivation for enterprises to flourish and industries to transform and upgrade, and it is not difficult to find that the effect of import and export trade and foreign direct investment on the capacity utilization of enterprises can also be achieved through technological innovation, so it is of great importance to deeply discuss the relationship between technological innovation and the capacity utilization of enterprises. In addition, most of the literature on the relationship between technological innovation and enterprise capacity utilization usually focuses on technological innovation in a broad sense, while it is worth exploring further whether the uncertainty of the impact of technological innovation on enterprise capacity utilization is related to the intensity of innovation. Therefore, this paper takes manufacturing A-share listed companies as the research sample and, based on the study by Liao et al. (2020), classifies technological innovation into breakthrough innovation and incremental innovation [25], focusing on exploring the impact of the different intensity of technological innovation on the capacity utilization of manufacturing firms. The main marginal contributions of this paper are as follows. Firstly, it enriches the research on the impact of technological innovation on the capacity utilization of enterprises. This paper explores the relationship between technological innovation of different intensities and the capacity utilization of enterprises by dividing technological innovation into breakthrough technological innovation and incremental technological innovation, and finds that breakthrough technological innovation more substantially drives the capacity utilization of enterprises, providing a theoretical and practical basis for the government to introduce targeted innovation incentive policies. Secondly, it investigates the regulatory role of the institutional environment and deepens the research on the relationship between technological innovation and the capacity utilization of enterprises. The article finds that a good institutional environment can stimulate enterprises’ willingness to innovate, and at the same time provide a solid guarantee for their innovation. This finding has important practical implications, that is, when implementing the innovation-driven development strategy, it is important to ensure the efficiency of market competition, provide a good ecosystem of financial service entities, and improve the regulations related to intellectual property rights. Thirdly, differences in the nature of ownership were explored. The sub-sample regression finds that SOEs have better innate conditions to carry out innovative activities, and technological innovation can increase the capacity utilization of SOEs to a greater extent. This finding suggests that local government agencies should provide a good ground for innovation activities by non-state-owned SMEs.

3. Theoretical Research

3.1. Breakthrough and Incremental Innovation and Firm Capacity Utilization

Innovation is the first driving force to improve the technological level and production efficiency of enterprises and is an important engine to lead sustainable economic development. By making technological inputs instead of traditional ones and transforming the previous crude development model, enterprises will effectively improve the quality and efficiency of their products and thus have strong market competitiveness [26]. Enterprises enhance innovation development and increase the added value of their products, which is also conducive to smoother export trade and expansion of overseas markets [27]. With the rapid climb in market share, the production capacity of enterprises has been effectively activated, so the capacity utilization of enterprises has been significantly increased. [28]. In addition, the introduction of innovation into the production activities of enterprises is conducive to the optimal allocation of production factors, upgrading the production processes and procedures, and improving production efficiency. Increased production efficiency means higher performance in production, effectively reducing material losses and waste of resources such as manpower and equipment. When faced with good market prospects, high production efficiency allows companies to meet external production demand in a timely and orderly manner without the need for large capacity expansion [29].

Faced with a rapidly changing and competitive business environment, companies need to constantly renew themselves to gain a foothold in the market, which requires them to explore and enhance their capabilities. Breakthrough innovation is a disruptive, deep-rooted innovation that results in new possibilities for companies and markets. Breakthrough innovation means breaking the reliance on old technological paths, emphasizing the disruption and reconfiguration of existing knowledge and technology, transforming the development of new products and services, and opening up new markets in a more radical way [30,31]. Incremental innovation is an improved, shallow innovation that results in an improved status quo. Incremental innovation by firms implies the improvement of the original technology, emphasizing the re-integration, enhancement, and absorption of existing knowledge, optimizing the original products and services, and expanding the market in a more robust way [32]. Both breakthrough innovation and incremental innovation can improve the efficiency of a firm’s operations, enhance the market competitiveness of its products and services, and keep the firm’s supply in sync with the upgrading of demand and market level, and thus both modes of innovation in terms of intensity have a positive impact on the firm’s capacity utilization.

China is now entering a phase of high-quality development, where industries are constantly being updated and iterated, and companies are in a more demanding and dynamic market environment. With frequent changes in consumer preferences and raw material supply, the only way to avoid being eliminated from the market is to constantly innovate to meet market demand. Breakthrough innovation faces far more uncertainty and risk than incremental innovation, but when successful, it can often be very profitable and even have the ability to disrupt the market and cause a change in the industry [33,34]. Breakthrough innovation enables companies to stand out in a competitive landscape, helping them to establish new market niches and promote market growth, which in turn effectively drives up capacity utilization. In contrast, incremental innovation is the improvement of existing products, which can bring short-term performance gains, but does not create sustainable market demand in the long run, and in a saturated market, incremental innovation has a limited effect on capacity utilization [35]. In addition, firms may build further capacity due to temporary demand growth. Based on the above arguments, the following hypothesis is proposed.

Hypothesis 1a.

Breakthrough innovation positively contributes to firm capacity utilization.

Hypothesis 1b.

Incremental innovation positively contributes to firm capacity utilization.

Hypothesis 1c.

Compared to incremental innovation, breakthrough innovation increases the firm’s capacity utilization to a greater extent.

3.2. The Regulatory Role of the Institutional Environment

Technological innovation is an important source for promoting business development and driving sustained socio-economic improvement. A good institutional environment means a more efficient economic operation, which can effectively promote the generation and use of new technologies [36]. The relationship between technological innovation and firm capacity utilization may therefore also be influenced by the institutional environment.

Firstly, in order to protect local enterprises’ development and pursue economic growth during their tenure, local governments prefer to impose barriers on foreign enterprises entering the local market, such as implementing differential quality inspection standards or other restrictive policies, resulting in less efficient market competition. In a good institutional environment, market mechanisms play a leading role and market competition is effective. In a market-led situation, market mechanisms drive firms to focus on the dynamics of market demand and to incentivize them to meet emerging market needs by taking risks with innovation. Breakthrough innovation uses transformative technologies to develop new products or services, giving firms a definite competitive advantage in the intense competition. Firms thus gain a higher potential for market expansion and are further able to effectively increase capacity utilization. In addition, the market’s mechanism of survival of the fittest allows outdated capacity to be eliminated, and innovative companies to gain a higher market share through low production costs, high productivity, and quality products and services. Secondly, the orderly functioning of the financial system is crucial to technological innovation [37], but there is still a tendency for financial resources to be tilted towards large enterprises or state-owned enterprises in China, leaving non-state-owned SMEs vulnerable to problems such as “difficulty in accessing credit”. Breakthrough innovation requires large amounts of financial support, and when faced with a lack of research funds, most companies turn to incremental innovation, which costs less money and has a shorter R&D cycle. However, incremental innovation has limited contribution to the technology level of enterprises, while breakthrough innovation can bring about a more radical technological advancement. In regions with a better institutional environment, the ecosystem for financial services and innovation-driven development is better established, and innovative entities are guaranteed access to capital. The increased efficiency of financial resource allocation motivates enterprises to carry out breakthrough innovations in order to gain stronger market competitiveness. Finally, the intellectual property rights system and how to effectively defend their legitimate rights and interests when their intellectual property rights are infringed upon is also an important consideration for enterprises to innovate. The intellectual property rights’ (IPR) system allows firms to have exclusive rewards for innovation and is an important safeguard for their innovation outcomes [38]. Breakthrough innovation is subject to greater uncertainty and risk, and innovation activities tend to have stronger positive externalities, so firms are only willing to engage in innovative behavior if the IPR regime provides them with sufficient security for their innovation outcomes. In addition, when intellectual property rights are infringed, efficient and fair legal proceedings can also solve the worries of enterprises, so that they do not step into the “difficult and cumbersome process of defending rights” dilemma. A sound legal system can also help to stimulate innovation and increase productivity. Based on the above discussion, the following hypotheses are proposed.

Hypothesis 2.

The better the institutional environment in a firm’s region, the more conducive it is to promoting a positive relationship between breakthrough innovation and firm capacity utilization.

3.3. Heterogeneity of Ownership Attributes

In terms of innovation activities, state-owned enterprises and non-state-owned enterprises face different resource and information constraints [39]. SOEs have a natural political association with the government and are charged with the important responsibility of promoting national economic growth. In terms of innovation activities, SOEs concentrate on high-quality research resources, including official state research institutions such as the National Key Laboratory and Engineering Research Center. This allows SOEs to effectively save time and R&D costs on preliminary basic common technologies, and therefore be able to quickly build research platforms and move into research focus. Due to their political affiliation, SOEs have a competitive advantage in accessing credit resources that is difficult for non-SOEs to compete with. Their high level of political affiliation and relatively good credit standing provide them with wide access to financing and relatively low financing costs. In addition, SOEs have a high degree of industry focus and have accumulated rich production experience in their industries, which is conducive to capturing the innovation information required by the market and targeting their innovation activities. State-owned enterprises have good innate conditions to carry out innovation activities, which are more conducive to the smooth implementation of technological innovation, and therefore the capacity utilization improvement effect brought by technological innovation is more obvious. Based on the above discussion, the following hypotheses are proposed.

Hypothesis 3.

Both breakthrough and incremental innovations by SOEs contribute more significantly to capacity utilization than by non-SOEs.

4. Study Design

4.1. Study Sample and Data Sources

To better reflect the capacity utilization characteristics of China’s manufacturing industry after the implementation of supply-side structural reforms in 2015, this paper selected the data of A-share listed companies in China’s manufacturing industry from 2016 to 2020 as the research sample. The following operations were performed on the sample data: (1) excluding the samples of *ST, ST, SST class companies (ST is a special treatment for trading in the shares of listed companies with unusual financial or other conditions and is prefixed by the abbreviation "ST". ST does not imply a penalty for the listed company, but is a risk warning to guide consumers towards rational investment. If the company’s stock rises within ±5% per day during this period, the trading will be normalized when the company enters normal status. *ST means that the company has made losses for three consecutive years and, in the absence of surprises, the decision to delist will be made the following month (this will vary from stock to stock). SST stocks are those that have operated at a loss for two consecutive years and have been given special treatment but have not yet completed their share reform.); (2) excluding the samples of companies with missing financial data and abnormal indicators; (3) using the linear interpolation method to fill in some missing values. To make the data more comparable, the companies’ business income is deflated by the ex-factory price index of industrial producers, and all other financial data are deflated by the GDP deflator, with the base year being 2010. Financial data of listed companies are obtained from the Wind database; patent application data of enterprises are obtained from the China Research Data Service Platform; and price deflators are obtained from the China Statistical Yearbook.

4.2. Variable Definitions

• Explained variable: capacity utilization (CU). There is currently no uniform standard in academia on how to measure the capacity utilization of enterprises, and the common methods are the peak method [40], the production function method [41], the cost function method [42], and the data envelope method [43,44]. The peak method uses peak output as the benchmark to measure capacity utilization, but it is doubtful whether peak output represents production capacity; the function method is less applicable to Chinese companies as their production behavior is susceptible to external intervention. Compared to the above methods, the data envelope approach is more suitable for this study as it does not require the setting of production or cost functions and the measurement data are more easily available. The output-oriented BCC model was chosen to measure the capacity utilization of enterprises using MAXDEA 8.21 software;
• Explanatory variables: breakthrough innovation (Patent 1) and incremental innovation (Patent 2). To further explore the impact of different intensities of technological innovation (Patent) on firms’ capacity utilization more accurately, technological innovation was divided into breakthrough innovation and incremental innovation for the study. Referring to Liao et al. (2020), the number of invention-type patents applied by firms is used to measure breakthrough innovation, and the sum of utility-type and design-type patents applied to measure incremental innovation [25]. Considering that the impact of innovation has a certain lag, the explanatory variables are treated with a one-period lag by referring to Leoncini (2017) [45]. To reduce data volatility, the explanatory variables were logged by adding 1;
• Moderating variable: institutional environment (Inst). Wang et al. published the China Sub-Provincial Marketization Index Report in 2021, which used an index format to describe the relative process of marketization in 31 Chinese provinces, autonomous regions, and municipalities directly under the central government [46]. The report contains an overall marketization index, as well as five sub-indices that constitute the overall marketization index. The total marketization index is selected to act as a proxy variable for the institutional environment. As the report only reports the marketization index for 2016–2019, drawing on Ma (2015) [47], the marketization index was trend extrapolated to finally obtain the marketization index for China by province for 2016–2020;
• Control variables. External government intervention factors and other firms’ own factors can also have an impact on firms’ capacity utilization. Drawing on Ma et al. (2018) [48] and Wang et al. (2021) [49], firm growth (Growth), government subsidies (Govern), total asset turnover (Turnover), return on net assets (Roe), capital intensity (Capital), equity concentration (Share), and capital intensity (Lev) were used as control variables. The definitions and measures of the variables are shown in

  Table 1. Variable definitions and measures.

  Variable Properties	Variable Name	Variable Codes	Variable Measures
  Explained variables	Capacity utilization	CU	Data Envelopment Approach (DEA)
  Explanatory variables	Technological innovation	Patent	Number of patent applications, add 1 and take the logarithm
  	Breakthrough innovation	Patent 1	Number of patent applications for inventions, plus one and taken as a logarithm
  	Incremental innovation	Patent 2	Number of utility model and design-based patent applications.
  Moderating variables	Institutional environment	Inst	Total marketability index, taken as logarithm
  Control variables	Business Growth	Growth	Operating income growth rate
  	Government grants	Govern	Government grants/total assets
  	Total asset turnover ratio	Turnover	Operating income/total assets
  	Return on net assets	Roe	Net profit/net assets
  	Capital Intensity	Capital	Fixed Assets/Total Assets
  	Concentration of shareholding	Share	Percentage of shareholding of the largest shareholder
  	Capital Gearing	Lev	Total liabilities/total assets

  .

4.3. Model Design

Based on the previous analysis, Model 1 and Model 2 were first constructed to test the relationship between breakthrough and incremental innovation and firm capacity utilization.

$$\begin{array}{ll}C{U}_{i,t}=& {\beta }_0+{\beta }_{1}Patent{1}_{i,t-1}+{\beta }_{2}Deman{d}_{i,t}+{\beta }_{3}Gover{n}_{i,t}+{\beta }_{4}Turnove{r}_{i,t}+{\beta }_{5}Ro{e}_{i,t}+{\beta }_{6}Capita{l}_{i,t}\\ & +{\beta }_{7}Shar{e}_{i,t}+{\beta }_8{Lev}_{i,t}+{\gamma }_{i,t}+{\tau }_{i,t}+{\epsilon }_{i,t}\end{array}$$

(1)

$$\begin{array}{ll}C{U}_{i,t}=& {\beta }_0+{\beta }_{1}Patent{2}_{i,t-1}+{\beta }_{2}Deman{d}_{i,t}+{\beta }_{3}Gover{n}_{i,t}+{\beta }_{4}Turnove{r}_{i,t}+{\beta }_{5}Ro{e}_{i,t}+{\beta }_{6}Capita{l}_{i,t}\\ & +{\beta }_{7}Shar{e}_{i,t}+{\beta }_8{Lev}_{i,t}+{\gamma }_{i,t}+{\tau }_{i,t}+{\epsilon }_{i,t}\end{array}$$

(2)

After that, according to Wen et al. (2005) [50], the interaction terms of institutional environment and breakthrough and incremental innovation were added to the regressions of the Model (3) and Model (4), respectively, to analyze the moderating effect of the institutional environment of the region where the firm is located on the firm’s innovation performance:

$$\begin{array}{ll}C{U}_{i,t}=& {\beta }_0+{\beta }_{1}Patent{1}_{i,t-1}+{\beta }_{2}Patent{1}_{i,t-1}\ast Ins{t}_{k,t}+{\beta }_{3}Deman{d}_{i,t}+{\beta }_{4}Gover{n}_{i,t}+{\beta }_{5}Turnove{r}_{i,t}\\ & +{\beta }_{6}Ro{e}_{i,t}+{\beta }_{7}Capita{l}_{i,t}+{\beta }_{8}Shar{e}_{i,t}+{\beta }_9{Lev}_{i,t}+{\beta }_{10}Ins{t}_{k,t}+{\gamma }_{i,t}+{\tau }_{i,t}+{\epsilon }_{i,t}\end{array}$$

(3)

$$\begin{array}{ll}C{U}_{i,t}=& {\beta }_0+{\beta }_{1}Patent{2}_{i,t-1}+{\beta }_{2}Patent{2}_{i,t-1}\ast Ins{t}_{k,t}+{\beta }_{3}Deman{d}_{i,t}+{\beta }_{4}Gover{n}_{i,t}+{\beta }_{5}Turnove{r}_{i,t}\\ & +{\beta }_{6}Ro{e}_{i,t}+{\beta }_{7}Capita{l}_{i,t}+{\beta }_{8}Shar{e}_{i,t}+{\beta }_9{Lev}_{i,t}+{\beta }_{10}Ins{t}_{k,t}+{\gamma }_{i,t}+{\tau }_{i,t}+{\epsilon }_{i,t}\end{array}$$

(4)

In Models 1–4, year effects are included in ${\gamma }_{i,t}$, industry effects are included in ${\tau }_{i,t}$, and ${\epsilon }_{i,t}$ are random disturbance terms. Based on the results of the Hausman test, fixed effects models were chosen for Models 1–4 in this paper.

5. Empirical Analysis

5.1. Capacity Utilization Measurement Results and Analysis

Considering the variability in the level of economic development and technological innovation in different regions, the 31 provinces of China were divided into three regions: East, Central, and West according to the study of Lan and Zhao (2020) [51]. The capacity utilization rate of China’s manufacturing industry based on the regional division from 2016 to 2020 is shown in

Table 2. Descriptive statistical analysis of capacity utilization rates in East, Central, and West regions.

	East Region				Central Region				West Region
	(a)%	(b)%	(c)%	(d)	(a)%	(b)%	(c)%	(d)	(a)%	(b)%	(c)%	(d)
2016	13.88	100	74.18	0.18	11.96	100	66.26	0.18	8.53	100	69.80	0.21
2017	12.75	100	75.54	0.19	15.82	100	68.85	0.19	12.61	100	70.71	0.22
2018	10.76	100	73.88	0.20	12.95	100	68.42	0.20	10.28	100	70.55	0.23
2019	11.69	100	72.92	0.19	13.31	100	67.72	0.19	14.21	100	69.09	0.22
2020	11.45	100	71.34	0.19	15.48	100	66.18	0.19	7.39	100	68.35	0.21
N	987	987	987	987	270	270	270	270	192	192	192	192

Note: The symbols (a), (b), (c), and (d) in the table represent the minimum, maximum, average value, and standard deviation, respectively, and the average value is obtained by weighting the proportion of the enterprise’s main business revenue.

.

From 2016 to 2017, the average capacity utilization in the East, Central and West regions showed an increase, which is closely related to the supply-side structural reform introduced in China at the end of 2015. The conference set “three to go, one to makeup, one to reduce” as the top economic task for 2016, with “removing production capacity” being the first of the five major tasks. However, the full outbreak of COVID-19 in 2020 hit the manufacturing sector hard, with industrial GDP growth of only 0.39% in 2020, down 89.13% year-on-year. At the beginning of the outbreak, most enterprises were in a state of shutdown and production was suspended due to the implementation of closed management. The full outbreak of the epidemic was at the beginning of the year, and factors of production could not improve between regions. Under the influence of multiple factors, the capacity utilization of manufacturing enterprises dropped significantly. As shown in Table 2, the average capacity utilization in the East region fell from 73.88% to 71.34%, the average capacity utilization in the Central region fell from 68.42% to 66.18% and the average capacity utilization in the West region fell from 70.55% to 68.35% in 2018–2020.

The average capacity utilization fluctuates from 71% to 75% in the East region, 66–69% in the Central region, and 68–71% in the West region from 2016 to 2020, with the capacity utilization in the East region being higher than that in the Central and West regions at an overall level. This is due to the fact that since the reform and opening up, the East region achieved rapid development by virtue of its coastal location, and its gross domestic product ranks among the highest in the country. The strong internal demand and the high degree of openness to the outside world have enabled the East region to utilize its production capacity more fully. In addition, the extensive distribution of high-tech industries in economically developed regions and the concentration of innovative enterprises have brought about significant knowledge spillovers, creating favorable conditions for local enterprises to develop technological innovations to improve capacity utilization. The above factors lead to higher utilization of production capacity in the East region.

5.2. Impact of Breakthrough and Incremental Innovation on Firm Capacity Utilization

Table 3. Impact of technological innovation on firms’ capacity utilization.

Variables	(1)	(2)	(3)	(4)
Patent		0.014 ***
		(11.22)
Patent 1			0.017 ***
			(13.28)
Patent 2				0.012 ***
				(9.86)
Growth	0.003 ***	0.003 ***	0.003 ***	0.003 ***
	(5.07)	(5.19)	(5.29)	(5.13)
Govern	−1.577 ***	−1.782 ***	−1.877 ***	−1.677 ***
	(−6.96)	(−7.91)	(−8.35)	(−7.44)
Turnover	0.232 ***	0.228 ***	0.229 ***	0.229 ***
	(48.10)	(47.51)	(47.90)	(47.50)
Roe	0.075 ***	0.066 ***	0.064 ***	0.068 ***
	(9.52)	(8.47)	(8.28)	(8.69)
Capital	−0.297 ***	−0.288 ***	−0.283 ***	−0.293 ***
	(−20.06)	(−19.54)	(−19.24)	(−19.90)
Share	0.066 ***	0.062 ***	0.062 ***	0.061 ***
	(5.11)	(4.83)	(4.85)	(4.73)
Lev	0.173 ***	0.141 ***	0.138 ***	0.146 ***
	(17.10)	(13.61)	(13.33)	(14.09)
_cons	0.304 ***	0.277 ***	0.284 ***	0.289 ***
	(38.11)	(33.44)	(35.34)	(35.64)
Year FE	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes
N	7235	7235	7235	7235
R2	0.440	0.449	0.453	0.447

Note: *** p < 0.01.

shows the regression results of the impact of technological innovation on firm capacity utilization, column (1) is the benchmark column containing only the control variables, column (2) adds the independent variable of technological innovation (Patent) to the benchmark column to test the overall impact of technological innovation on firm capacity utilization to ensure the validity of the results, columns (3) and (4) add the independent variables of breakthrough innovation (Patent 1) and incremental innovation (Patent 2) to the benchmark column, respectively. The regression results for the control variables in column (1) are consistent with actual social development. The results in column (2) show that the regression coefficient of technological innovation on capacity utilization is significantly positive at the 1% confidence level, indicating that enterprises undertaking technological research and implementing innovative development are conducive to promoting capacity utilization. In columns (3) and (4), the regression coefficients of both breakthrough and incremental innovation are significantly positive at 1% confidence level, indicating that both breakthrough and incremental innovation are effective in increasing the capacity utilization of enterprises, and hypotheses 1a and 1b are valid. However, comparing the regression coefficients of breakthrough innovation and incremental innovation in columns (3) and (4), we can see that the regression coefficient of breakthrough innovation on enterprise capacity utilization is greater than that of incremental innovation, indicating that breakthrough innovation has a greater effect on enterprise capacity utilization than incremental innovation, and hypothesis 1c holds. The reason for this is that breakthrough innovation uses transformative technologies to develop new products or services, helping firms to open up new market segments, effectively activating capacity and converting it into real output. In a market environment where consumer preferences are changing frequently and competition is becoming fierce, breakthrough innovation allows firms to keep pace with the rapid changes in the market, and capacity is more fully utilized [52]. Incremental innovation is an improvement of existing products and services, which can bring about a certain increase in demand and a reduction in production costs due to an increase in productivity [53]. However, incremental innovation does not create new market segments, and when the market in which a company’s product is located is saturated, the demand growth brought by incremental innovation is not sustainable, and the company may build additional production capacity due to the temporary demand growth, resulting in a weaker effect on capacity utilization.

5.3. The Moderating Role of the Institutional Environment

In order to investigate the moderating role of the institutional environment in the impact of breakthrough innovation and incremental innovation on capacity utilization, the variables were decentered and the interaction term between institutional environment and technological innovation was introduced into the regression equation, and the regression results are shown in

Table 4. The moderating role of the institutional environment.

Variables	(5)	(6)	(7)	(8)
Patent		0.015 ***
		(11.74)
Patent 1			0.017 ***
			(13.74)
Patent 2				0.013 ***
				(10.27)
Inst	−0.078 ***	−0.081 ***	−0.081 ***	−0.081 ***
	(−7.04)	(−7.22)	(−7.30)	(−7.24)
P × Inst		0.014 **
		(2.13)
P1 × Inst			0.022 ***
			(3.15)
P2 × Inst				0.005
				(0.81)
Growth	0.003 ***	0.003 ***	0.003 ***	0.003 ***
	(4.77)	(4.82)	(4.83)	(4.80)
Govern	−1.658 ***	−1.894 ***	−1.979 ***	−1.781 ***
	(−7.33)	(−8.43)	(−8.83)	(−7.91)
Turnover	0.237 ***	0.233 ***	0.234 ***	0.233 ***
	(48.76)	(48.31)	(48.79)	(48.23)
Roe	0.074 ***	0.065 ***	0.063 ***	0.067 ***
	(9.47)	(8.31)	(8.11)	(8.57)
Capital	−0.301 ***	−0.291 ***	−0.287 ***	−0.296 ***
	(−20.36)	(−19.85)	(−19.60)	(−20.18)
Share	0.062 ***	0.058 ***	0.058 ***	0.057 ***
	(4.86)	(4.52)	(4.58)	(4.43)
Lev	0.164 ***	0.131 ***	0.127 ***	0.136 ***
	(16.24)	(12.58)	(12.26)	(13.10)
_cons	−0.009 **	−0.006	−0.006 *	−0.006
	(−2.46)	(−1.61)	(−1.69)	(−1.58)
Year FE	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes
N	7235	7235	7235	7235
R2	0.444	0.454	0.459	0.452

Note: * p < 0.1, ** p < 0.05, *** p < 0.01.

. Column (7) shows the moderating effect of the institutional environment on the overall technological innovation and capacity utilization of enterprises. The regression coefficient of the interaction term is significantly positive at the 5% confidence level, indicating that a good institutional environment strengthens the positive relationship between technological innovation and capacity utilization. Column (9) is the regression result of introducing the interaction term between breakthrough innovation and institutional environment into the equation. The regression coefficient of the interaction term is significantly positive at 1% confidence level, indicating that the better the institutional environment, the more effective it is in promoting the positive relationship between breakthrough innovation and enterprise capacity utilization, and hypothesis 2 holds. While in column (9), when the interaction term between incremental innovation and institutional environment is introduced into the equation regression, the coefficient of the interaction term is not significant, indicating that the institutional environment has no significant influence on the relationship between incremental innovation and firms’ capacity utilization. Under the market mechanism, market competition becomes more efficient, driving firms to develop breakthrough innovations to meet the dynamic changes in market demand. The opening of new markets effectively drives up firms’ capacity utilization [21]. It can also use the market mechanism to spontaneously eliminate low-tech and inefficient enterprises and create a wider market space for high-efficiency enterprises. Breakthrough innovation requires large amounts of capital investment, and due to the lack of capital, firms will turn to incremental innovation with lower technology content but lower R&D costs at the same time. The improvement of financial resource allocation efficiency gives firms important support conditions to carry out breakthrough innovation [54]. In addition, the improvement of the legal system related to intellectual property rights can give innovative enterprises legal protection and effectively stimulate them to carry out technological innovation.

5.4. Heterogeneity of Ownership Attributes

Drawing on the research methodology of Liu (2000) [55], the sample enterprises were divided into state-owned and non-state-owned enterprises to study the heterogeneity of ownership attributes linking technological innovation and capacity utilization of enterprises, and the regression results are shown in

Table 5. Heterogeneity of ownership attributes.

Variables	(9)	(10)	(11)	(12)	(13)	(14)
Patent	0.027 ***	0.006 ***
	(12.59)	(3.69)
Patent 1			0.025 ***	0.011 ***
			(11.42)	(6.75)
Patent 2					0.026 ***	0.004 ***
					(12.00)	(2.68)
Growth	0.005 ***	0.002 ***	0.005 ***	0.002 ***	0.005 ***	0.002 ***
	(3.61)	(3.47)	(3.57)	(3.53)	(3.62)	(3.45)
Govern	−2.221 ***	−1.846 ***	−2.252 ***	−1.967 ***	−2.024 ***	−1.795 ***
	(−6.17)	(−6.49)	(−6.22)	(−6.91)	(−5.62)	(−6.31)
Turnover	0.250 ***	0.206 ***	0.251 ***	0.206 ***	0.253 ***	0.206 ***
	(30.15)	(34.86)	(30.04)	(35.06)	(30.36)	(34.82)
Roe	0.018 *	0.178 ***	0.019 **	0.171 ***	0.020 **	0.180 ***
	(1.95)	(12.70)	(2.03)	(12.28)	(2.11)	(12.88)
Capital	−0.183 ***	−0.307 ***	−0.181 ***	−0.304 ***	−0.199 ***	−0.309 ***
	(−7.07)	(−17.08)	(−6.93)	(−16.95)	(−7.71)	(−17.17)
Share	0.024	0.068 ***	0.022	0.071 ***	0.018	0.067 ***
	(1.00)	(4.46)	(0.95)	(4.63)	(0.77)	(4.38)
Lev	0.150 ***	0.153 ***	0.162 ***	0.143 ***	0.153 ***	0.157 ***
	(8.41)	(11.68)	(9.06)	(11.02)	(8.54)	(11.99)
_cons	0.215 ***	0.301 ***	0.239 ***	0.299 ***	0.238 ***	0.307 ***
	(13.19)	(31.03)	(14.98)	(31.75)	(14.97)	(32.48)
Year FE	Yes	Yes	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes	Yes	Yes
N	2315	4920	2315	4920	2315	4920
R2	0.546	0.423	0.541	0.427	0.543	0.423

Note: * p < 0.1, ** p < 0.05, *** p < 0.01.

. Columns (9), (11), and (13) show the regression results for the SOE sample, while columns (10), (12), and (14) show the non-SOE sample’s results. The regression coefficients of SOE innovation on capacity utilization are larger than those of non-SOEs, both for overall technological innovation and for breakthrough and incremental innovation differentiated according to intensity and are significant at the 1% confidence level. The results of the between-group difference test indicate that the regression coefficients of the innovation variables in the three sets of relationships are heterogeneous. The above results suggest that compared to non-SOEs, breakthrough and incremental innovation by SOEs can contribute more to capacity utilization, and hypothesis 3 holds. With the advancement in market-oriented reforms, enterprises with different property rights face different resource and information constraints. As an important arrangement for a country’s economic development, SOEs have natural advantages in terms of basic experimental equipment, common technologies, and information channels, which give SOEs excellent conditions for innovation activities [56]. In addition, SOEs are large and well-funded, which can provide continuous financial support for R&D and innovation activities and guarantee their continuous and stable promotion. Based on these factors, when SOEs engage in technological innovation activities, they tend to be more likely to succeed than non-SOEs, and therefore can contribute more significantly to capacity utilization.

5.5. Robustness Tests

To further verify the reliability of the findings, this study conducted a robustness test using the replacement variable method, in which firms lagged. One period of R&D expenditure (RD) was used as a proxy variable for technological innovation (Patent) in the regression analysis. The results of the tests are shown in

Table 6. Robustness tests.

Variables	(15)	(16)	(17)	(18)
RD	0.033 ***	0.035 ***	0.040 ***	0.027 ***
	(24.10)	(25.34)	(17.44)	(15.46)
Inst		−0.100 ***
		(−9.37)
RD × Inst		0.024 ***
		(3.66)
Growth	0.003 ***	0.003 ***	0.005 ***	0.002 ***
	(5.62)	(5.12)	(4.04)	(3.77)
Govern	−1.778 ***	−1.904 ***	−1.940 ***	−2.017 ***
	(−8.16)	(−8.78)	(−5.57)	(−7.26)
Turnover	0.215 ***	0.221 ***	0.237 ***	0.195 ***
	(45.73)	(46.93)	(29.07)	(33.62)
Roe	0.051 ***	0.048 ***	0.012	0.146 ***
	(6.74)	(6.42)	(1.35)	(10.55)
Capital	−0.294 ***	−0.296 ***	−0.204 ***	−0.316 ***
	(−20.63)	(−20.88)	(−8.15)	(−17.98)
Share	0.037 ***	0.031 **	−0.027	0.061 ***
	(2.99)	(2.50)	(−1.16)	(4.08)
Lev	0.096 ***	0.080 ***	0.112 ***	0.105 ***
	(9.38)	(7.78)	(6.35)	(8.13)
_cons	0.074 ***	−0.003	0.004	0.121 ***
	(5.99)	(−0.68)	(0.20)	(7.87)
Year FE	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes
N	7235	7235	2315	4920
R2	0.482	0.489	0.572	0.449

Note: ** p < 0.05, *** p < 0.01.

. Overall, the results of the robustness tests are generally consistent with the above empirical results. In addition, the core explanatory variables have been treated with a lag of one period in the analysis of this paper, which can eliminate to a certain extent the endogeneity problem caused by the causality of the explained variables and the core explanatory variables. At the same time, this study has controlled for the influence of external government intervention and internal operational factors, which greatly reduces the endogeneity caused by omitted variables. Therefore, in combination with the above analysis, the findings of this paper are relatively robust.

6. Research Conclusions and Policy Recommendations

6.1. Research Conclusions

The current structural overcapacity problem brought about by the lack of core technology and insufficient independent innovation capacity in the manufacturing industry will not be conducive to achieving China’s economic goals under the new development stage. Therefore, this paper selected A-share listed companies in China’s manufacturing industry as the research target and explored in depth the impact of breakthrough and incremental innovation on the capacity utilization of manufacturing enterprises, as well as the moderating role of the regional institutional environment and the heterogeneity of the nature of ownership. The findings of the study are as follows: (1) Both breakthrough and incremental innovation are positively correlated with firm capacity utilization, however, when comparing the two, it is found that the positive impact of breakthrough innovation on enterprises’ capacity utilization is stronger than that of incremental innovation; (2) The institutional environment has a moderating effect on the relationship between breakthrough innovation and capacity utilization. The positive relationship between breakthrough technological innovation and capacity utilization is enhanced when the institutional environment of the region where the enterprise is located is excellent, which means the market competition efficiency is improved, financial resources are effectively allocated, and the rules and regulations relating to intellectual property rights are more effective, while the impact of the institutional environment on the relationship between incremental innovation and capacity utilization is not significant; (3) State-owned enterprises, with their resource endowment and institutional advantages, are able to promote capacity utilization to a greater extent through breakthrough and incremental innovation. At the theoretical level, this paper further improves the theoretical framework of the relationship between technological innovation and enterprise capacity utilization, and enriches the related literature in the field of technological innovation; in the practical sense, the findings of this paper are conducive to resolving the structural overcapacity, promoting the transformation of old and new driving forces in the manufacturing industry, and thus helping to achieve sustained positive economic development in China.

In addition, due to the problems of data collection, index measurement, and research depth, there are still some shortcomings in this article. Firstly, due to the serious lack of data on certain manufacturing enterprises, the research sample of the article is only 1447 listed companies, and the number of enterprises is so small that it cannot properly show the overall characteristics of China’s manufacturing capacity utilization; secondly, in order to better reflect the impact of the demand side on enterprise capacity utilization, some scholars combined market demand-supply ratio to measure enterprise capacity utilization, while this paper is stymied by the lack of data, and does not include the market demand-supply ratio into the scope of measurement; thirdly, technological innovation can be divided not only according to the intensity of innovation but also according to the means of innovation into product innovation and process innovation. The means of technological innovation are not discussed in this paper. Scholars can conduct deeper research on this issue later.

6.2. Policy Recommendations

Based on the findings of this paper, the following policy recommendations are made.

• Encourage enterprises to carry out breakthrough innovation to enhance corporate and social economic benefits. As breakthrough innovation faces greater uncertainty, most enterprises choose the more prudent incremental innovation behavior when carrying out innovation activities. However, this has had little impact on enhancing the independent innovation capabilities of manufacturing enterprises and promoting the transformation and upgrading of industrial structures, and the innovative products and services are still unable to fully meet the dynamic changes and escalating market demands. Therefore, policymakers should formulate reasonable support policies to encourage enterprises to carry out breakthrough innovation, such as appropriate tax and fee reductions based on the ratio of breakthrough innovation to total technological innovation, and increased subsidies for breakthrough innovation;
• Provide a favorable institutional environment for enterprise technological innovation and fully mobilize their enthusiasm for innovation. Local governments should reduce intervention in the local market and improve the efficiency of competition among market players, so that the market can spontaneously eliminate low-tech and inefficient enterprises. At the same time, the current situation of the unreasonable allocation of financial resources in China should be improved to ensure that innovative SMEs are provided with better credit arrangements. In addition, the intellectual property rights system and the accompanying judicial procedures for the defense of rights should be continuously improved to protect the legitimate rights and interests of innovators and fully motivate enterprises to innovate;
• Building a complete basic technology reserve and sharing platform. China’s R&D and innovation efforts are mostly focused on applied technologies that can yield short-term benefits, while often neglecting basic research that can substantially improve the technological level and development capability of the industry. Fundamental technologies are important for the lasting and healthy development of the industry. Chinese government departments should take the initiative to undertake R&D on basic technologies, build a platform for basic technology reserves, and share this technology reserve with the general public, so that all types of innovation agents can benefit from it.