Labor Contract Law and inventor mobility: evidence from China

This paper investigates the causal effect of employment protection on inventor mobility. Taking the enactment of China’s Labor Contract Law in 2008 as a quasi-natural experiment, our difference-in-difference estimate utilizes two-dimensional variations: firm ownership (i.e., SOEs vs. non-SOEs) and year (i.e., before and after 2008). Using combined data on patent applications filed at the State Intellectual Property Office of China and listed manufacturing companies over 2004–2012, we find that the law plays a sizeable positive role in reducing the likelihood of inventor mobility. This effect is more pronounced for firms with higher labor intensity, stricter law enforcement, higher innovation dependence, lower R&D team stability, and inventors that work outside the core of R&D networks. Further, we provide consistent evidence for two plausible mechanisms for the positive effect: limiting the ability of employers to unfairly dismiss inventors and substituting low-skilled workers with inventors. In addition, the law causes firms to obtain more high-quality patents and reduces bankruptcy risk. Overall, our findings shed new light on the economic effects of labor protection in a typical emerging market.