Employee protection and innovation in small and medium-sized enterprises: the moderating effect of regional digitalization

Prior research suggests the increasingly important role of employees in identifying and generating innovative opportunities in the digital economy, yet our understanding of the effect of employee protection on the innovation of small and medium-sized enterprises (SMEs) remains limited. This study addressed this gap, we integrate the resource-based view and institutional perspective to examine how employee protection affects SMEs innovation in emerging economies. Using negative binomial regression and the analysis of a national survey of 1698 Chinese private SMEs, we show that employee protection has an inverted U-shaped effect on SMEs innovation. Furthermore, this curvilinear relationship is positively moderated by regional digitalization such that the inverted U-shaped relationship is intensified when firms are in regions with higher levels of digitalization. Overall, this study contributes to the literature on SMEs innovation by examining how SMEs innovation is shaped by employee protection in the digital age. We also contribute to the employee protection literature by investigating its complicated effect on SMEs innovation in emerging economies.