Discussion
We have found that the technical employee turnover rate is higher in innovating firms than in non-innovating firms and that for firms that are carrying out R&D projects and are producing new commercial products further increases in the turnover rate discourage the firm's R&D efforts and lower its innovation performance. These findings are in accordance with the inverted U-shaped relations between employee turnover and innovation which have also been documented by some previous studies; see e.g., Müller and Peters (2010). The theoretical reasons for a positive relationship – new ideas brought into the firm by new employees – are supported by our study, but we also find that as the marginal benefits of employee turnover decreases while its costs increases, the impact of higher turnover eventually turns negative.
Thus, one of the key findings of the empirical analysis is that technical employee turnover in Chinese high-tech firms has a
negative influence on both R&D effort and innovation performance. While, as discussed in Section 2, this is not necessarily
inconsistent with theory, several distinguishing features of the Chinese innovation environment may also contribute to the
differences observed with respect to studies for more developed economies.
First, despite significant improvements, the protection of intellectual property in China is still relatively poor. For a given level
of employee mobility, Chinese firms face a higher risk of being copied by competitors and losing benefits of innovation due to the
transmission of information via leavers. Second, due to the large population, the average number of job candidates for one
position in China is very large, which results in higher recruitment cost and higher risk of mismatch. Both factors reduce the net
benefit brought by newcomers to innovation. So, again, firms facing high labor mobility have weaker incentives to innovate more
because the high labor mobility creates leakages of the gains from innovation.
Third, the Chinese corporate culture is often considered to bemore conservative thanWestern culture. It is generally believed that
the best strategy for new joiners is “shut the mouth and open the eyes and ears”, which limits the spillover of new ideas from new
joiners. Since the positive effect of labor mobility on innovation (which is mainly brought by new employees joining the firm) is
smaller, it is less likely that high labor mobility contributes to more R&D efforts activities or higher innovation performance.
Moreover, in Chinese firms it is usually relatively small informal groups which actually make the decisions. A newcomer's
ideas are not be valued unless she is involved in one of these small groups or a member thereof speaks for her. As it takes time for
small groups to accept newcomers, Chinese firms are slower in observing a newcomer's innovative ideas and in reaping the
benefits thereof. Although Chinese firms are claimed to have spent large amounts of money on poaching high level technical
employees, the overall impact on firm level innovation seems to be negative. Lastly, the general level of trust in China is lower
(Wang et al., 2011), which means that the newcomers are less trusted and as a consequence their ideas are less valued. This is
reinforced by the fact that as lack of trust is mutual, new employees do not commit themselves to innovate either.
Overall, there are a number of reasons forwhy the higher employee turnover among technical employees is less likely to facilitate
R&D activity in China. This list of characteristics specific to the internal labor markets of Chinese firms is of coursemainly speculative.
It should be noted, however, that Aoshima (2008) also finds a negative effect of the mobility of engineers on Japanese companies'
innovation performance. As China and Japan have many elements of a conservative corporate culture in common, this may explain
why the labor mobility seems to influence innovation activity in China and Japan differently than inWestern countries.