Human Capital, Market Environment, and Firm Innovation in Chinese Manufacturing Firms

Abstract

This paper explored firm-level innovation in different market environments from a human capital point of view using both theoretical and empirical approaches. In the theoretical model, two firms compete with each other in a two-stage Cournot competition game, the innovation stage and production stage. Theoretical results indicated that a firm’s innovation is not only determined by its human capital level, firm characteristics, and its market share, but also might be affected by market environment. In the empirical study, we used two firm-level datasets from China, one from metropolitan cities and one from mid-sized cities. Results show that skilled human capital is vital for firm innovation in metropolitan cities, while R&D plays an important role in firm innovation in mid-sized cities. The GM’s experience is more important for firms in metropolitan cities, while the GM’s education is more critical for firms in mid-sized cities. Moreover, GDP per capita has a positive effect on firm innovation in metropolitan cities, while it harms firm innovation in mid-sized cities. We further showed that the industry composition explanation could account for our results. Finally, we also tried IV estimation, and the related results are discussed.