High-quality innovation, supply-chain spillovers, and firm-level employment

Using the full text of invention patents filed by Chinese listed firms, we construct a firm-level innovation-quality index by pre-training and fine-tuning a deep learning language model, and link this measure to National Tax Survey records and disclosed supplier – customer dyads. From a value-chain coordination perspective, we examine bilateral labour-demand spillovers associated with focal firms’ innovation-quality upgrading. The results show that innovation-quality upgrading at focal firms significantly increases labour demand among upstream and downstream suppliers. A one-standard-deviation increase in innovation quality raises upstream and downstream employment by 0.84% and 0.77%, respectively. This study also employs a shift-share instrumental variable (SSIV) design to address potential endogeneity. Mechanism analyses identify two channels: an output-demand channel, whereby innovation quality raises productivity, profitability, and product quality, expanding input demand and downstream market demand; and a trade-credit channel, whereby improved innovation credentials strengthen reputation and balance-sheet capacity, enabling trade credit and guarantees that relax partners’ financing constraints and stimulate hiring. This study provides managers and policymakers with insights into how high-quality innovation stabilizes employment.