The employment effect of innovation: evidence from Bangladesh and Pakistan
The analysis of the impact of innovation on employment growth is an important topic for policy-makers. Unemployment is an important social topic, and the effects of innovation on employment are often poorly understood. Despite the significance of this relationship, very few studies on this topic are yet available for developing countries compared with the developed ones. This paper contributes to this scant literature by investigating the employment effects of innovation for two South Asian developing countries: Bangladesh and Pakistan. We further analyse whether this relationship shows country-specific and industry-specific differences.
Our analysis shows that both product and process innovation spur employment in this region as a whole, in both low-tech and high-tech industries, even after controlling for a number of firm-specific characteristics. Moreover, although both innovation types also have significant, positive impacts on employment growth of all Bangladeshi and of all Pakistani firms separately, they are important factors for employment growth of only high- tech Bangladeshi firms and of only low-tech Pakistani firms. Contrary to most previous studies, we witness an insignificant effect of growth of labour cost on employment growth, perhaps due to the availability of cheaper labour force compared with the developed countries. We notice that some of the innovation determinants exert different influences across industries and across both countries. The same holds true for the determinants of employment growth.
JEL Classification: J23, 031, 033
Keywords: Bangladesh, Employment Growth, Pakistan, Product Innovation, Process Innovation
The impact of technological innovation on firm performance can primarily be observed in two ways: the productivity impact of innovation and the effect of innovation on employment. (1) The former is mainly an area of interest for managers/industrialists, while the latter is crucial for policy-makers. The effect of technology on firm productivity is a relatively straightforward phenomenon and often shows a positive link [Geroski, et al. (1993); Loof and Heshmati (2006); Koellinger (2008); Hall, et al. (2009)], but the relationship between innovation and employment growth is a complex one. (2) One of the reasons for this complexity is the variety of channels through which both product and process innovation can affect employment growth. Although both types of innovations often coexist, the motivation and implication to have them in place are rather different.
One of the desired effects of product innovation is the market expansion (3) (especially when the new product is not a direct substitute of an old one), demanding more labour force. If the innovating firm is a first-mover and launches a radically new product into the market, which is difficult to imitate by latecomers and if it also protects the product through exclusivity rights (e.g., patents, trademarks, etc.), the innovating firm can operate from a monopoly position. The employment effect of product innovation may then be negative, because the monopolist may restrict output and instead raise prices. Process innovations often reduce the amount of labour needed since they are operationalised to make more efficient production processes to obtain the same output with lower cost or less labour (per unit), suggesting a...
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