Factor Market Segmentation and Regional Innovation: Evidence From China

ABSTRACT This study examines the effect of factor market segmentation and its interaction with regional innovation activities in an imperfect institutional environment. We use the price method to measure the degree of factor market segmentation in 279 prefecture‐level cities in China from 1999 to 2019 and construct a spatial weight matrix of factor flow to analyze the relationship between factor market segmentation and regional innovation performance. We find that under the decentralization system, local governments implement factor market segmentation strategies without sacrificing local innovation performance. They compete for innovation and exhibit spatial and temporal heterogeneity. These characteristics also apply to innovation peripheral cities, which take the dominant position. A mechanism test reveals that factor market segmentation strategies adopted by larger markets have a greater negative impact on innovation performance in other regions. In contrast, the level of local innovation performance is positively influenced by the number of local laborers, which can be reduced by such strategies when they hinder labor inflow. By providing more systematic evidence from an imperfect institutional environment, this study deepens the understanding of local protection behavior and innovation activities, and has policy implications for promoting regional innovation performance.