Highly skilled foreign labor introduction policies and corporate innovation: Evidence from a natural experiment in China

Abstract

The helping-hand theory of government suggests that government can directly spur innovation by providing subsidies, tax credits, and bank loans. However, the existing literature largely ignores more indirect mechanisms such as when government attracts highly skilled foreign labor to work in local firms and thereby enhances the accumulation of corporate human capital. To fill this theoretical gap, we exploit a unique policy shock that began in 2008 when local governments issued highly skilled foreign labor introduction policies that attracted expatriate Chinese to return home to work. By using a difference-in-differences model, we find that the enactment of these policies promotes corporate innovation and the effect is more pronounced for companies previously lacking skilled employees. The results suggest that the upgrade of human capital serves as a channel for this effect. Moreover, the policy causes a greater innovation-incentive effect for those native companies that require more high-skilled labor, suggesting that the highly skilled foreign labor is complementary to that of locals. Last, we find that political connected non-state-owned enterprises whose senior executives have overseas experience benefit more from the policy. Our study provides policy implications by revealing an overseas talent-driven innovation development path.