Misallocation of Talent and Innovation: evidence from China

Abstract

ABSTRACT This study examined the effects of the misallocation of talent between the government and private enterprise sectors on innovation. By using the 2005 inter-census population survey and patent database, we find a negative correlation between misallocation of talent and innovation intensity. Exploring possible mechanisms, we conclude that this negative correlation between misallocation of talent and innovation was best explained by the negative impact of such misallocation upon entrepreneurship and R&D spending. That is, misallocations of talent reduce the willingness of people to be productive Schumpeterian entrepreneurs, and the majority of companies affected by such misallocation are reluctant to increase R&D spending. Most importantly, we find that excessive talent enters government departments in prefectures worse the suppression of innovation. This result sheds new light on the important role of allocation of talent on innovation for scholars and policymakers. Our findings have important implications for how to effectively allocate talent between the government vs.enterprise sectors in order to encourage more productive, value-creating activities.