Do rising labour costs promote technology upgrading? A novel theoretical hypothesis of an inverted U-shaped relationship

Abstract

Although many studies have examined the impact of rising labour costs on enterprises’ innovation, there remains a lack of consensus on this issue. Combining the induced innovation hypothesis and the impeded innovation perspective, this study constructs a theoretical model to comprehensively investigate the mechanism of the effect of rising labour costs on technology upgrading. The theoretical model demonstrates that rising labour costs increase technology upgrading ‘impetus’ but reduce ‘capability’. Finally, an inverted U-shaped relationship between rising labour costs and technology upgrading is revealed. Empirical evaluations using data from Chinese listed companies confirm the theoretical hypotheses. This study also investigates the moderating effect of market position, wherein firms with low competitive positions have greater curvature. The results provide new explanations for the theoretical debate and practical evidence, with significant implications for emerging markets regarding the transition from a low-cost labour development model to an innovation-driven growth model.