Study on Innovative Small and Medium Sized Enterprises and the Creation of Employment (May July 2001)

Transcription

1 Study on Innovative Small and Medium Sized Enterprises and the Creation of Employment (May July 2001) Presentation Report on The Impact of Product versus Process Innovation on Employment in SMEs Study supported by the Innovation Directorate (DG Enterprise, European Commission) Prepared by: Austrian Institute for Small Business Research (IfGH) and Instituto Vasco de Estudios e Investigación (IKEI) Vienna, May 2001 Information about the results of the Innovation Policy study series is available at:

2 The Impact of Product versus Process Innovation on Employment in SMEs Content Introduction Theoretical Relationships Review of Empirical Results Conclusion The responsibility for the content of this report lies with the Austrian Institute for Small Business Research (IfGH) A-1040 Vienna, Gußhausstrasse 8 Tel , Fax Internet: ifgh@ifgh.ac.at

3 The Impact of Product versus Process Innovation on Employment in SMEs Preface This presentation report is produced in the frame of a research study on Innovative SMEs and the Creation of Employment on behalf of the European Commission, Directorate-General Enterprise. The results of the entire project shall together with other assignments strengthen the knowledge base of innovation performers and policies in Europe and will serve to effectively support the analysis, updating and dissemination of priority topics of the new innovation policy of the Commission titled Innovation in a knowledge-driven economy ( 1 ). The topic covered in this report was selected from the results of the third interim report of the above study, and is the final one presented in a line of three presentation reports produced in the scope of this project. The final report of the study will be available in November Introduction Findings from the third interim report as well as from previous presentation reports of this project seem to ascertain the existence of a positive relationship between innovation and the creation of employment. However, several studies in this field point to the necessity of differentiating between kinds of innovation when analysing their effects on employment, as effects might differ for various types of innovation, especially for product and process innovations. Empirical research has shown that, for example, a disaggregation of expenditure for product and process innovation might alter results obtained by using rather general types of indicators for innovation. Despite enormous efforts made in theoretical and empirical research, so far, the linkages between innovation and the creation of employment seem far from being clear-cut. With this regard it is the purpose of this report to further explore the complex relationship between innovation and employment in SMEs by presenting recent empirical findings differentiating between different effects of product and process innovation on the creation of employment. Theoretical Relationships As far as theory is concerned product innovation that generates new demand is generally assumed to increase employment, at least at the firm level, while process innovation shall decrease employment as it enables a company to achieve the same output with fewer resources frequently with less labour ( 2 ). However, the overall impact of innovation on employment is the outcome of a number of opposing forces and the mechanisms behind are not as straightforward as they might look at first glance. With both, product and process innovation direct effects may be offset by indirect ones and the balance of both of these effects depends upon a number of conditions of which market structure, price elasticity of demand, economies of scale, and possibilities of substituting capital for labour seem to be the most important ones ( 3 ). On firm level, the relationship between innovation and employment is determined by an additional maybe the most important factor: the potential of an innovation to create a competitive advantage for the respective firm, which is seen a precondition for gaining market shares and creating jobs for an individual innovative enterprise. In the following a review of empirical research is presented, differentiating between the different effects of product and process innovation in SMEs on the creation of employment. Studies dealing with this issue have been conducted to the best of our knowledge in Austria, Belgium, Germany, the Netherlands, and Spain. 1 European Commission (2000) 2 3 OECD (1996) For a detailed description of how these factors affect the impact of product and process innovation on employment see the 2 nd presentation report titled: The Impact of Innovation on Employment on Industry and Macro Level

4 Review of Empirical Results Box 1: Summary of empirical findings The impact of innovation on labour demand growth is higher in SMEs than in large firms with both, product and process innovation having a positive impact on employment growth in SMEs (source: Blechinger and Pfeifer (1997)). Product innovating enterprises show higher increases in employment compared to non innovative or pure process innovating firms. Thereby the larger a product innovating company is, the better are its sales expectations, but the worse are its employment expectations (source: Blechinger et al. (1997)). Product innovation leads to employment increases especially if such effects are measured after a time lag of three to four years. Process innovation tends to lower employment (source: Leo and Steiner (1995)). SMEs that do both, product and process innovation show the highest employment growth. SMEs that do only product or only process innovation do not differ in their effect on employment creation from each other (source: Lettmayr et al. (1997)). Innovation has a significant positive effect on employment only if product and process innovations are conducted jointly. However, using a different specification a positive effect of product innovation and a mostly weak or insignificant effect of process innovation is found (source: (Ludsteck and Steiner (2000)). Enterprises with a high product related R&D intensity have a significantly higher growth of employment compared to total R&D intensive enterprises in manufacturing and in services. Enterprises with a high process related R&D intensity have a positive impact on employment in manufacturing and a highly positive impact in services (source: Blechinger et.al (1997)). Joint product and process innovation has a positive effect on employment growth in industrial firms, process innovation has a positive impact in the trade sector, and product innovations that do not imply process changes do not have any significant effect on employment growth (source: Van den Crucke (1998)). Employment increased more in enterprises which directed their innovative activities towards the development of new products, while employment growth is less in enterprises where innovation is aimed at the development of new processes (source: Wille-Maus (1999)). Product innovation has positive effects on employment creation, while in smaller enterprises even the introduction of process innovation has a positive effect on employment growth. Only process innovation introduced by larger enterprises has a negative impact (source: Jimeno (1999)). The relationship between technological change and employment has amongst others been analysed by Blechinger and Pfeifer (1997) in Germany. The authors come to the conclusion that the impact of product and process innovation on labour demand growth is higher in small and medium sized firms than in large ones and that size related differences are more pronounced than regional differences. In their study they rely on survey data from West German manufacturing enterprises for the years 1993 and Employment growth is estimated as a function of sales growth and labour costs growth. Basis of their assessment is the so-called MIP (Mannheimer Innovations Panel), a yearly investigation of about German enterprises of the manufacturing sector relying on self reported statements of enterprises on the conduction of innovation. Innovation is thereby defined as novelty introduced to the market as opposed to invention. The analysis differentiates between product, process and combined product and process innovation. In accordance with the Oslo Manual the definition of product innovation comprises not only new, but also adapted (improved) products, as long as adaptation goes beyond design changes. Process innovation is defined as the internal use of new or improved techniques of production (including automation) or new forms of production organisation. Analysis strictly looks at innovation on firm level and does not consider industry, sector or overall effects. Blechinger and Pfeifer (1997) find that 57 % in 1993 and 48 % in 1994, of all enterprises surveyed were innovative enterprises. Innovativity in general correlates positively with firm-size, but R&D intensity in innovative small and medium sized enterprises surpasses R&D intensity of (innovative) large enterprises. Small enterprises are more innovative than large ones if they have crossed over the so-called R&D-border. In such cases small enterprises invest more in research ( 4 ). The analysis also recognises first tendencies of outsourcing of R&D of large enterprises to university and research institutions. As mentioned, the share of innovative enterprises decreased in the time period covered, but innovation intensity increased especially in (innovative) SMEs. The authors conclude that effects of technological progress are more pronounced in small and medium sized enterprises. For large scale enterprises, technological progress in the form of new processes and products is part of the enterprise 4 compare also Harhoff / Licht (1996) - 2 -

5 Box 2: Methodological overview of Blechinger and Pfeifer (1997) bibliographic information: Blechinger, D./Pfeifer, F.: Qualifikation, Beschäftigung und technischer, Fortschritt (Qualification, employment and technological progress), Zentrum für Europäische Wirtschaftsforschung (ZEW), Mannheim, 1997 regional coverage: Germany sector coverage: manufacturing time period covered: quantitative data used: panel data of about German enterprises from the so-called MIP (Mannheim Innovation Panel) definition of SMEs: less than 500 employees innovation indicators used: self-reported statements of enterprises on the conduction of product, process, or combined product and process innovation employment indicators used: growth rate of labour demand estimated as a function of sales growth and labour costs growth methodology adapted: econometric modelling main results: The impact of innovation on labour demand growth is higher in small and medium sized enterprises than in large ones with both, product and process innovation having a positive impact on employment growth in SMEs. additional remarks: very broad definition of SMEs comprising enterprises with up to 500 employees strategy and has little short term effects. According to the authors, an observation period of two to four years seems too short to reflect (employment) effects of innovation in large scale enterprises. With increasing size of an enterprise process innovation becomes more important and is used more frequently than in SMEs as a mean to cost reductions, especially labour costs. Blechinger and Pfeifer (1997) furthermore find, that in West Germany process innovation in SMEs led to employment growth of 11 %. This might be due to the more competitive environment of SMEs. Higher employment, thus, is a consequence of lower costs due to improved processes. In large scale enterprises such effects are negligible: Although lower costs in such cases also lead to lower prices and higher employment, increases only suffice to level out employment reductions due to rationalisation. With regard to product innovation the authors figure out that it leads to employment increases in small and medium sized as well as in large scale enterprises, especially, if such effects are measured after a time lag of three to four years. A methodological overview of the study by Blechinger and Pfeifer (1997) is given in Box 2. Data from a series of German surveys in 1992, 1993 and 1994 that focused on product innovation combined with data from the First Community Innovation Survey (CIS) for Germany confirm the stronger effect of innovation on employment in small firms. In their analyses Blechinger et al. (1997) ask whether product innovating enterprises differ in their sales and employment expectations from non innovative companies and companies that only performed process innovations. The results of their analysis are presented in Table 1. Product innovations should cause growth in sales, provided they are not simply replacing old products. As can be seen from Table 1 product innovating enterprises in fact expect significantly higher increases in sales than non innovative and purely process innovating firms for the time period 1995 to 1997 both, in West and in East Germany. In West Germany, however, product innovating firms expect higher employment levels during the same period only, when enterprise size is explicitly taken into account. The authors find that the larger a company is, the better are its sales expectations, and the worse are its employment expectations both, in West and East Germany. Thus, product innovating enterprises seem to have better prospects in the development of sales than non innovative ones. But the degree to which sales translate into employment differs in the group of product innovating firms and depends on the character of the innovation. Blechinger et al. (1997) find that large impacts of product innovation go hand in hand with process improvement, which means that product innovations are accompanied by an improvement in the efficiency of production processes. Additionally, growth in sales due to an increase in demand for a new product has proven to lead to less employment growth than the same sales growth with old or only marginally improved products. Although confirming the positive employment effects of product innovation for Austria, Leo and Steiner (1995) also figure out the existence of a time lag concerning these effects already found by Blechinger and Pfeifer (1997). Their research is based on a survey of 600 industrial establishments from the Austrian manufacturing sector. The authors conclude from their analyses for the period 1990 to 1992 that planned product innovation tends to increase employment while process innovation tends to lower employment, though the results for the latter are not statis

6 Table 1: Sales and employment expectations in the manufacturing sector, , percentages of enterprises all companies non innovative and purely process innovating enterprises of which product innovating enterprises West Germany sales employees sales employees sales employees substantial increase slight increase no change slight decrease substantial decrease East Germany sales employees sales employees sales employees substantial increase slight increase no change slight decrease substantial decrease Source: Blechinger et al. (1997) tically significant. However, the positive employment effects of product innovation seem to vary over time. The authors find that employment is not affected immediately after implementation but rises soon afterwards and declines later. In the long run high expectations for both, product and process innovation increase the likelihood of an increase in employment, while product innovation to develop substitute products can decrease employment. Lettmayr et al. (1997) find that in Austria in small and medium sized enterprises those firms that do both, product and process innovation have the highest impact on employment growth. SMEs that do only product or only process innovation do not differ in their effect on employment creation. These results are based on survey data from 250 Austrian small and medium sized enterprises from five rather technology oriented sectors (i.e. computer and office machinery, electrical equipment, chemicals/plastic products, technical services and software and telecommunications) and relate to the period 1995 to Information on the innovative behaviour basically stems from self reported statements of the entrepreneurs. The different effects of product and process innovation on turnover as well as employment growth are presented in the following Graph 1. Graph 1: Employment and turnover change in Austrian SMEs, , average growth rates in percent non innovative process innovation product innovation both employment change turnover change Source: Lettmayr et al. (1997) - 4 -

7 Box 3: Methodological overview of Ludsteck and Steiner (2000) bibliographic information: Ludsteck, J./Steiner, V.: Innovation and employment at the firm level An empirical analysis using data from CIS II, Conference paper for the conference on Innovation and Enterprise Creation: Statistics and Indicators, in Sophia Antipolis on Nov. 2000, Sophia Antipolis, 2000 regional coverage: all member states of the European Union plus Norway sector coverage: manufacturing time period covered: 1997 quantitative data used: data from the Second Community Innovation Survey (CIS II) definition of SMEs: no specific consideration of SMEs innovation indicators used: different proxies for product and process innovation employment indicators used: labour demand methodology adapted: econometric modelling (static labour demand model) main results: Innovation has a significant positive effect on employment only if product and process innovations are conducted jointly. However, using a different specification of product and process innovation a positive effect of product innovation and a mostly weak or insignificant effect of process innovation is found for most of the countries of the European Union. additional remarks: no differentiation of findings by size-classes of enterprises SMEs that do both, product and process innovation yield the highest growth of turnover followed by enterprises with only product innovation, while enterprises with only process innovation perform worse than non innovative enterprises with regard to turnover growth. It is therefore concluded that the introduction of process innovation in small and medium sized enterprises might rather be a reaction on decreasing revenues. With regard to employment growth only those SMEs that do both, product as well as process innovation yield a perspicuous increase. Employment growth of the other groups does not differ from each other. More recent research for all member states of the European Union and Norway based on data from the Second Community Innovation survey (CIS II) confirms the findings of Lettmayr et al. (1997) for several other countries. Ludsteck and Steiner (2000) find in their analysis of the European manufacturing sector that innovation has a significant effect on employment only if product as well as process innovation is conducted jointly. The authors estimate a static labour demand model which relates a firm s employment level to innovation indicators. In their basic specification the innovation indicators are a dummy for firms that only conducted product innovation, a dummy for firms that only conduct process innovation, and a dummy for firms that implemented both kinds of innovation. Based on this specification the authors find that there is no significant effect on labour demand if firms only introduce product innovation (and no process innovation). The only exemption found is France. Likewise, the authors find no significant effect on labour demand if enterprises only introduce process innovation (and no product innovation). In contrast, there is a significant positive effect on labour demand if product and process innovations are implemented jointly. This effect is particularly pronounced in Germany, Norway, Spain, France, Finland and Italy. In Germany, for example, a firm, which conducts both, product and process innovation increases its demand for labour by about 10 %. However, in an extended specification of their basic labour demand model, where they use a firms turnover related to new and improved products as a proxy for product innovation and a firms expenditure on machinery related to innovation as a proxy for process innovation Ludsteck and Steiner (2000) find a positive effect of product innovation on the creation of employment in most of the member states of the European Union. The largest effects of both, new and improved products on employment are found in Germany and in Spain. Regarding new products only, the computed employment elasticities ( 5 ) are relatively small in France, Italy, Ireland, Portugal and, especially, in Sweden. On the other hand employment elasticities with respect to improved products are, except for Portugal, relatively high in these countries. 5 This is the elasticity of employment with respect to a firms innovation activity measured by a 1 % change of the respective proxy variable

8 With regard to the elasticity of employment with respect to process innovation the authors find significant positive effects in Spain, France and Italy, only. However, the estimated elasticities are very small in these countries and statistically insignificant in most of the other countries. An overview of this study by Ludsteck and Steiner (2000), which seems specifically interesting due to the fact that it covers all member countries of the European Union plus Norway and points to the different outcomes of analyses depending on the respective indicators used is given in Box 3. Blechinger et al. (1997) confirm the positive effect of product innovation found in the previously stated studies for the Netherlands using Community Innovation Survey (CIS) data, as well. The authors ascertain an overall positive effect of innovation, expressed by R&D intensity, on employment at firm level. However, differentiating between kinds of innovation they find that during the period 1988 to 1992 manufacturing enterprises in the Netherlands with a high product innovation intensity have a significantly higher growth of employment compared to total R&D intensive enterprises. In services, the level of significance is lower, which might support the impression that R&D is perhaps a less meaningful measure of innovation in services. Process related R&D is found to have a positive impact on employment in manufacturing, and a highly significant positive impact in services. It should, however, be noted that product and process related R&D in services play a somewhat different role than in manufacturing, since the product of an enterprise in the service sector is often a process. An overview of the study by Blechinger et al. (1997) is given in Box 4. Deviating results are obtained by Van den Crucke (1998) who analyses the impact of product, process and combined product and process innovation on enterprise growth in Belgium both, in terms of value added and employment. In his study of 466 companies of all size-classes covering the industrial, trade and services sector in Belgium, Van den Crucke (1998) finds in a first step of his analyses that enterprise age, and (particular) size are negatively related to growth of value added and employment in the period 1990 to A high capital intensity is found to have a positive impact on growth while a high share of blue collar workers has a negative one. The dummy variable, which indicates that a firm is an independent unit, also has a negative impact on growth for industrial firms. After controlling for these variables Van den Crucke (1998) finds that combined product and process innovation has a positive effect on growth in industrial firms. Thereby, the effect on value added is larger than on employment growth. Process innovation (new or strongly improved production processes including technological or organisational changes) has a positive impact on value added and employment growth in the trade sector. Product innovations (new products that have been commercialised) that did not imply process changes are not found to have any significant positive effect on growth of value added or employment in the industry, trade, and services sectors. Although not differentiating by size-class Wille- Maus (1999) also finds a positive effect of product innovation on employment in Norway. From his analyses including almost 3,700 Nor- Box 4: Methodological overview of Blechinger et al. (1997) bibliographic information: Blechinger, D./Kleinknecht, A./Licht, G./Pfeiffer, F.: The impact of innovation on employment in Europe: An analysis using CIS data, Zentrum für Europäische Wirtschaftsforschung (ZEW), Publication N 46 of the European Innovation Monitoring System (EIMS), Luxembourg, 1997 regional coverage: the Netherlands sector coverage: manufacturing and services time period covered: quantitative data used: data from the First Community Innovation Survey (CIS) definition of SMEs: no specific consideration of SMEs innovation indicators used: R&D intensity, product related R&D intensity, process related R&D intensity employment indicators used: number of employees methodology adapted: econometric modelling main results: Enterprises with a high product related R&D intensity have a significantly higher growth of employment compared to total R&D intensive enterprises in manufacturing and in services. Enterprises with a high process related R&D intensity have a positive impact on employment in manufacturing and a highly positive impact in services. additional remarks: no differentiation of findings by size-classes of enterprises - 6 -

9 wegian enterprises from all business sectors (except retailers, hotels and restaurants) the author concludes that during the time period 1995 to 1997 innovative enterprises (that introduced new methods in processing or new or improved products for final demand) had less employment growth than non innovative enterprises. However, the extent of the effect of innovation on employment seems to differ by aim of the innovative activity. During the time period under consideration employment increased more in innovative enterprises which directed their innovative activities towards the development of new products, while employment growth was less in innovative enterprises where innovation was aimed at the development of new processes. Interesting results with regard to the effects of technological progress on employment by different size classes of enterprises are published by Jimeno (1999) for Spain. The author finds from his analysis of survey data from 2,000 manufacturing enterprises with more than 10 employees that only process innovations introduced by larger enterprises (more than 1,000 employees) had a negative impact on employment growth during the period 1990 to Product innovations had positive effects on employment creation, while in smaller enterprises even the introduction of process innovations had a positive effect on employment growth. Thereby, an innovation is considered as product innovation if any (or several) of the following activities are included: a) the introduction of new raw materials, b) the introduction of new intermediate products, c) a new design or presentation for the product, d) the development of a new product to satisfy new needs. Process innovation is defined as the simultaneous introduction of new machinery and new methods of production. Conclusion Innovation is increasingly seen as a fundamental driving force behind the growth of output, productivity and employment in the European economy ( 6 ). Thereby, product innovation, which generates new demand is generally thought to increase employment, at least at the firm level, while process innovation is thought to decrease employment because it enables a company to achieve the same output with fewer resources, frequently with less labour. However, the overall impact of innovation on employment is the outcome of a number of opposing forces and the mechanisms behind are not as straightforward as they might look at first glance. Summing up empirical findings as to this regard it becomes obvious that no clear-cut conclusions can be drawn on the effects of product and process innovation on the creation of employment. The impact of process innovation on employment, thereby, is far more ambiguous than the impact of product innovation. From the results of the research presented it can be concluded that product innovation has a positive effect on employment creation at firm level in small and medium sized as well as in large scale enterprises. As far as process innovation is concerned the impact on employment seems to vary. Empirical research points to a positive impact of process innovation on employment creation, but several studies also yield reverse results. However, the findings indicate that especially in small and medium sized enterprises both, product and process innovation lead to employment increases, whereas in large enterprises the effect of process innovation on employment is not precisely detectable. 6 European Commission (1994) - 7 -

10 References Blechinger, D./Kleinknecht, A./Licht, G./Pfeiffer, F.: The impact of innovation on employment in Europe: An analysis using CIS data, Zentrum für Europäische Wirtschaftsforschung (ZEW), Publication N 46 of the European Innovation Monitoring System (EIMS), Luxembourg, Blechinger, D./Pfeifer, F.: Qualifikation, Beschäftigung und technischer, Fortschritt (Qualification, employment and technological progress), Zentrum für Europäische Wirtschaftsforschung (ZEW), Mannheim, European Commission: Innovation in a knowledge-driven economy, Communication from the Commission to the Council and the European Parliament, COM (2000) 567 final, Brussels, European Commission: Green paper on innovation, Luxembourg, Harhoff, D./Licht, G.: Das Innovationsverhalten von kleinen und mittleren Unternehmen: Ergebnisse des Mannheimer Innovationspanels (Innovative behaviour of small and medium sized enterprises: Results of the Mannheim innovation panel), Schriftenreihe des Zentrum für Europäische Wirtschaftsforschung (ZEW), Vol. 8, Baden-Baden, Jimeno J.F.: Es el Progreso Tecnológico la Causa del Desempleo en España? (Is technological progress the reason explaining the Spanish unemployment?), in: Empleo y Nuevas Tecnologías, ed. IESE, Leo, H./Steiner, V.: Innovation and employment at firm level, in: Publication N 50 of the European Innovation Monitoring System (EIMS), Luxembourg, Lettmayr, Ch./Oberholzner, T./Parger, T./Sheikh, S.: Auswirkungen von innovativen Unternehmen auf die Beschäftigtensituation (The impact of innovative enterprises on employment), Research report, Austrian Institute for Small Business Research (IfGH), Vienna, Ludsteck, J. / Steiner, V.: Innovation and employment at the firm level An empirical analysis using data from CIS II, Conference paper for the conference on Innovation and Enterprise Creation: Statistics and Indicators, in Sophia Antipolis on Nov. 2000, Sophia Antipolis, 2000 OECD: SMEs: Employment, innovation and growth, The Washington workshop, Organisation for Economic Co-operation and Development (OECD), Paris: OECD, Van den Crucke, B.: De impact van innovatie op de groei van toegevoegde waarde en tewerkstelling (The impact of innovation on turnover growth and employment), Federaal Planbureau, Wille-Maus, K.: Det norske forsknings- og innovasjonssysteme - statistikk og indikatorer. (The Norwegian research and innovation system, statistics and indicators), Norges Forskningsråd,