Government regulation on corporate compensation and innovation: Evidence from China's minimum wage policy

This study examines how minimum wage policy shapes firm innovation in an emerging market. We find that minimum wage increases in regions where firms are located stimulate firm innovation significantly. This incentive effect, transmitted mainly through higher labor costs that lower firm profits and force the existing staff to upgrade their skillsets and improve the firm workforce structure, is pronounced in labor-intensive industries and non-state-owned enterprises. Our findings provide policy implications for governments concerned with labor protection and firm transformation and upgrading.