The effect of capital and labour distortion on innovation

Abstract

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.

Managerial inclusiveness and corporate innovation in China

“…We also use another indicator which is calculated as the natural logarithms of one plus the sum of utility patent applications and design patent applications () to ensure the robustness of our results. Following Liang (2023), we construct a weighted mean of patent applications () as an alternative measure of corporate innovation. To test whether the results are robust, we also perform the same regression using R&D data instead of patent data.…”

“…In this section, we use another indicator which is calculated as the natural logarithms of one plus the sum of utility patent applications and design patent applications () to ensure the robustness of our results. At the same time, following Liang (2023), we construct a weighted mean of patents applications () as a proxy of corporate innovation, which is calculated based on the following weights: 50% on inventions, 30% on utility models and 20% on designs. However, we could not use citation‐weighted patent counts as an alternate proxy for corporate innovation because there is no authoritative access to patent citation data in China (Ullah et al, 2022; Yuan et al, 2023).…”

Factor market distortion, technological innovation, and environmental pollution

“…Yin et al ( 2018a ) pointed out that factor market distortion affects environmental pollution in four aspects: land, labor, capital, and the energy market. Liang ( 2022 ) analyzed the impact of capital market distortion and labor market distortion on technological innovation based on the factors mentioned above. The results show a significant negative correlation between the factor misallocation caused by capital and labor market distortions and technological innovation.…”

Labor market distortion and its impact on wage inequality in the modernization of small‐scale agriculture

“…In terms of environmental and pollution emissions, labor market distortion plays a critical role in determining the benefits of trading policies (Takeda et al, 2019). Empirical studies measure labor market distortion as the marginal yield of labor divided by its wage, and scholars analyze how it affects enterprises' outward foreign direct investment behavioral decisions and investment productivity (Kong et al, 2021), and innovation (Liang, 2023). Labor market distortion directly affects labor rewards and further impacts wage inequality.…”