Do Financial Constraints Matter for the Effectiveness of Human Capital on Improving Innovation? Evidence from China

Human capital is deemed as the first-order determinant of firm innovation. , in a transitional background such as China, financial constraints might drive the relation between human capital and innovations. We thus examine how financial constraints affect firm innovation in China. The evidence shows that an increase in financial constraints reduces innovation output and efficiency by decreasing the innovative effectiveness of human capital. Furthermore, financial constraints reduce the contribution of human capital to innovation in state-owned enterprises, but not in non-state-owned enterprises, implying that financial constraints also reduce firm innovation by worsening the principal-agent problem. We contribute by separating the mixed effects of financial constraints on innovation in a transitional economy, and by showing that the contribution of human capital to innovation depends on the financial situation of a firm