R&D responses to labor cost shock in China: does firm size matter?

Chih-Hai Yang ()
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Chih-Hai Yang: National Central University

Small Business Economics, 2023, vol. 61, issue 4, No 16, 1773-1793

Abstract: Abstract This study examines how a labor cost shock affects firms’ research and development (R&D) activity, focusing on the heterogeneous effect across firm size. Using the difference-in-differences approach, we investigate the R&D effect of Labor Contract Law (LCL) on firms in China. Empirical evidence reveals that, when considering the law binding issue, strict enforcement of the LCL has a negative treatment effect on treated firms’ R&D expenditure, which was reduced by 3.03%–6.75% on average, but it did not affect their likelihood of engaging in R&D. Crucially, the LCL’s R&D effect varies greatly by firm size. There is a positive treatment effect for large and medium-sized firms, whereas small treated firms reduce R&D in response to the labor cost shock. These heterogeneous effects apply to R&D propensity across firm size. The potential mechanisms for mitigating the LCL’s cost impact are discussed. Robustness checks reaffirm the above findings.

Keywords: Innovation; R&D; Labor cost; Labor contract law; High-tech; Ownership (search for similar items in EconPapers)
JEL-codes: J38 M12 O32 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11187-023-00741-x

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