Firm-level Human Capital and Innovation: Evidence from China

Understanding the factors that may produce a sustained rate of innovation is important for promoting economic development and growth. In this paper, we examine the role of human capital in firms’ innovation by using a large sample of manufacturing firms from China. We use two firm-level datasets from China: one from metropolitan cities, and one from provincial small and medium sized cities. Patent applications are used as the measure of innovation. Human capital indicators used include skilled human capital (number of highly educated workers), general manager’s education and tenure, and management team’s education and age. We find that skilled human capital has a significant positive effect on firms’ innovation, while the management team’s age has a significant negative effect on innovation. The General Manager’s tenure plays a significant positive role in firm innovation in metropolitan cities, while it is the General Manager’s education that has a positive and significant effect on firms’ innovation in small and middle cities. We also find that the effect of R&D on patents is insignificant for firms in large cities, but it is positive and significant in the smaller and medium sized cities. We conclude by noting some policy issues for promoting innovation in developing economies.