The effects of rural–urban migration on corporate innovation: Evidence from a natural experiment in China

• Author: Huasheng Gao,Jiang Luo,Deqiu Chen,Yujing Ma
• Date: 01 June 2020
• Published date: 01 June 2020
• DOI: http://doi.org/10.1111/fima.12280

DOI: 10.1111/fima.12280

ORIGINAL ARTICLE

The effects of rural–urban migration on corporate

innovation: Evidence from a natural experiment in

China

Deqiu Chen1Huasheng Gao2Jiang Luo3Yujin g Ma 4

1Business School, University of International

Business and Economics, Beijing, China

2Fanhai International School of Finance, Fudan

University, Shanghai, China

3NanyangBusiness School, Nanyang

TechnologicalUniversity, Singapore

4Business School, University of International

Business and Economics, Beijing, China

Correspondence

HuashengGao, Fanhai International School of

Finance,Fudan University, 318 South Zhongshun

Road,Shanghai, China.

Email:huashenggao@fudan.edu.cn

Fundinginformation

NationalNatural Science Foundation of

China,Grant/Award Numbers: 71790604,

71872045,71572035; Shanghai Pujiang Pro-

gram,Grant/Award Number: 18PJC007;Uni-

versityof International Business and Economics,

Grant/AwardNumber: 841612

Abstract

We show that the migration of low-skilled, rural workers to urban

centers has a negative causal effect on innovation of firms in such

urbancenters. O ur tests exploitthe staggered relaxation of city-level

household registration system in China, which facilitates rural resi-

dents to migrate to cities. We find a significant decrease in innova-

tion for firms headquartered in cities that have adopted such poli-

cies relative to firms headquartered in cities that have not. Overall,

our results support the view that an abundant supply of low-skilled

workers increases the benefit of using existing low-skilled technol-

ogy and thus reduces firms’ incentive to innovate.

KEYWORDS

innovation, patents, migration, low-skilled worker, household regis-

tration, hukou

1INTRODUCTION

In this paper, we examine the effects of rural–urban migration on innovation in the host areas. This research ques-

tion is important for at least two reasons. First, in the last few decades, hundreds of millions of people have moved

from rural to urban centers. For example,China has experienced a massive rural–urban migration in the last 40 years;

the percentage of rural population among total population in China has decreased steadily from approximately 80%

in 1978 to approximately 40% in 2018 (Figure 1). This phenomenon makes it important to study the consequences

of such rural–urban migration on economic growth. Our study focuses on innovation, because it is one key aspect of

growth policy. Second, most of this rural–urbanmigration has been taking place in China, India, and other developing

countries, which are also important players in the geography of innovation, and engines of world economic growth.

These countries have an urgent need to absorb their excessrural workforce that has been steadily moving into cities,

c

2019 Financial Management Association International

Financial Management. 2020;49:521–545. wileyonlinelibrary.com/journal/fima 521

522 CHEN ET AL.

0

10

20

30

40

50

60

70

80

90

Distribution of Rural and Urban Population

Urban populaon (%) Rural populaon (%)

FIGURE 1 Distribution of rural and urban population by year.This figure plots the percentage distribution of rural

and urban population in China during 1978–2018. Data are obtained from the National Bureau of Statistics of China

[Color figure can be viewed at wileyonlinelibrary.com]

while a sizable part of innovationin these countries is focused on automation. This naturally begs the question whether

policies facilitating rural–urban migrationare at loggerheads with those promoting innovation.

In this paper,we shed light on this issue and document a negative effect of rural–urban migration on firms’ innova-

tion in the migrant host areas, using a quasi-natural experimentin China. Our empirical identification strategy is based

onthe staggered relaxation of C hina’s city-levelhousehold registration system (also known as the hukou system), which

reduces the restriction for rural residents (who are largely undereducated and low-skilled) to migrate to nearby cities.

We use these policy changes to capture an exogenousincrease in the inflow of low-skilled migrant workers and exam-

ine the subsequent changes in corporate innovation in the host areas.

This setting is highly appealing from an empirical standpoint for two reasons. First, the motivation behind such

changes in the household registration system is to provide rural-to-urban migrants equal access to the urban wel-

fare system and reduce the rural–urban divide. As these policy changes were not made with the intention of hindering

innovation, potential effects on innovation are likely to be an unintended consequence. Second, the staggered policy

changes in several Chinese cities provide a set of counterfactuals for how corporate innovation would haveevolved

in the absence of such policy changes, and enable us to identify their effects in a difference-in-differences framework.

Because multiple shocks affect different firms exogenouslyat different times, we can avoid the common identification

difficulty faced by studies with a single shock: the potential biases and noise coinciding with the shock that directly

affects corporate innovation (Roberts & Whited, 2013).

We expect the rural–urbanmigration to decrease corporate innovation because companies are less likely to adopt

new technologies or innovate when there is an abundant supply of low-skilled labor (Lewis, 2011; Peri,2012). Suppose

a firm is currently using a preexisting, low-skilled technology operated by low-skilled workers and is considering to

invest in some risky research and development(R&D) projects to develop a high-quality technology operated by high-

skilled workers. The likelihood of making such an R&D investment depends on the cost of the R&D expenditureand

the relative profit of using the new technology versus the existing one. An abundant supply of low-skilled workers

in the labor market would increase the benefit of using the existing low-skilled technology and thus would enhance

the hurdle for the firm to pursue the new high-quality technology, which in turn would hinder corporate innovation.

Anecdotal evidence supports this view. Forexample, Habakkuk (1962) claims that technological progress was slower

in Britain than in the United States in the 19th century because Britain had a large supply of cheap, low-skilled workers.