Education and Innovation:  The Long Shadow of the Cultural Revolution

How important is the education of CEOs to firm level innovation?  In this paper, we examine the human capital cost of an external loss of education on subsequent innovation by firms and ask if it impacted firms more than 30 years later.  We examine the ensuing innovation of Chinese firms with CEOs who turned 18 during the Cultural Revolution which sharply reduced their chances of attending college.  Using multiple approaches to control for selection, including whether a CEO turned 18 during the Cultural Revolution, we show that Chinese firms led by CEOs without a college degree spend less on R&D, generate fewer patents, and receive fewer citations to these patents. Our results show the long-term importance of education to innovation and success for firms and their nations.

Many firms seek to capitalize on the human capital of their employees by organizing in such a way that maximizes positive spillover effects.  Firms can encourage innovation and human capital sharing in multiple ways, e.g., through hiring practices, incentive systems, and a company culture that tolerates failure in the pursuit of new ideas. Often, a firm’s CEO is responsible for setting a culture that can either encourage or discourage innovation. We examine the importance of education to new ideas and innovation by examining the impact of education on innovation by firms through the leadership their CEOs.  In this paper, we explore if the CEO education influences innovation that arises from the firm. 

We use a particular historical episode of China—the Cultural Revolution (1966-1976) —to examine the lingering impact of closing universities and colleges on firms over 30 years after the Cultural Revolution ended.  The Cultural Revolution in China was one of the largest adverse events of the 20th century. It not only affected millions of Chinese—political elites and ordinary people alike—but also prevented individuals from accessing higher education during peak college learning years due to the government shut down of all colleges and universities.  Chinese students were unable to obtain higher education for a ten-year period, until the colleges and universities were reopened in 1977. During this time, an entire cohort of students missed their opportunity to attain formal higher education during their peak learning years.  We explore how access to education in key college attendance years can impact firm spending on R&D and innovation and use the Cultural Revolution as a negative shock that impacted individuals for a generation.

Our results, using the Cultural Revolution instrument and other samples show that firms with a CEO without a college education have lower R&D, fewer patent applications, and lower indicators of innovation success.  Our results are consistent with decreased access to education and thus less human capital having long lasting negative effects for firms.  It also shows that socio-political events that interrupt a generation's access to education, such as the Cultural Revolution, have long lasting negative effects for firms and economies that wish to encourage innovation.