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Factor market distortion and corporate innovation: Theory and evidence from China

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  • Xin, Fu
  • Sheng, Ran
  • Zhang, Jie
  • Bai, Kairui

Abstract

The paper models the effect of distortion in factor markets on corporate innovation in a developing country, where the factor markets are underdeveloped in contrast to product markets. The distortion between factor markets and product markets has deteriorated the capability of firms to obtain profits, thereby dampening the incentives of firms to invest in innovation. Using a detailed firm-level dataset with manufacturing corporate innovation activities from 2008 to 2014, we testify to the prediction from the theoretical models that distortion depresses corporate R&D investment as well as R&D per capita. We strengthen our results using an IV approach to address reverse causality. Overall, our results have shed light on an emerging literature on distortion and innovation.

Suggested Citation

  • Xin, Fu & Sheng, Ran & Zhang, Jie & Bai, Kairui, 2024. "Factor market distortion and corporate innovation: Theory and evidence from China," Journal of Asian Economics, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:asieco:v:94:y:2024:i:c:s1049007824000733
    DOI: 10.1016/j.asieco.2024.101778
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    More about this item

    Keywords

    Factor market distortion; Corporate innovation; Profit squeeze; China;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East

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