["Economics of Transition and Institutional Change, EarlyView. ", "\nABSTRACT\nThis study examines how relaxing internal migration restrictions affects skill upgrading of firms in developing countries, leveraging the 2014 Hukou reform in China Hukou reform as a quasi‐natural experiment. In China, the Hukou reform in 2014 significantly eliminated internal migration obstacles in cities with populations below 5 million, whereas the migration obstacles in megacities remained unaffected. Utilising a difference‐in‐differences method, the empirical findings reveal that the relaxation of migration restrictions has significantly facilitated firms' skill upgrading as measured by the employment share of highly educated employees. The effect is more salient among firms facing more stringent financing constraints, labour‐intensive firms and state‐owned firms. Mechanism analysis indicates that the reform lowered settlement thresholds in treated cities, enabling firms to attract more educated employees without notable wage increases. Additionally, relaxing migration restrictions has boosted firms' total factor productivity (TFP), suggesting that greater labour mobility not only facilitates skill upgrading but also improves efficiency. These findings provide insights into the role of relaxing migration restrictions in addressing skill mismatches and fostering productivity growth in developing economies.\n"]