Factor misallocation has significant effects on productivity and innovation. Innovation is widely regarded as the most important element for economic growth. This article aims to study how capital and labour distortions influence innovation activities in China. We apply system generalised methods of moments using a natural experiment with an exogenous shock. The results indicate that the measurements for factor misallocation are significantly negatively correlated to innovation. The findings have important implications for emerging countries to improve their innovation productivity.
This paper shows a systematic literature review using HistCiteTM in the context of factor market misallocation in China. Four key research streams are identified: government intervention; misallocation explanation; market distortion and regional factor distortion. Further, the paper identifies three emerging research streams: endogeneity; legislation relating to factors of production; and knowledge management. Factor markets misallocation has been a lasting problem since the market‐oriented reform implemented by the Chinese Government. The academic literature review mainly focuses on the misallocation under Chinese national situation.
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