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 Innovation on the Skill Level of Jobs 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, December 2000 Information about the results of the Innovation Policy study series is available at:

2 The Impact of Innovation on the Skill Level of Jobs in SMEs Content Introduction The Relationship between Technology and Skills Review of Empirical Results Conclusion Content 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 Preface The Impact of Innovation on the Skill Level of Jobs in SMEs 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, DG 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 knowledgedriven economy. 1 The topic covered in this report was selected from the results of the first interim report of the project, which contains a comprehensive literature review and analysis of the theoretical and empirical material produced on the relationship between innovative small and medium sized enterprises (SMEs) and the creation of employment in the 90s in all member states of the European Union plus Norway and the United States. Further steps of the project, which is expected to be finished by September 2001, include the conduction of empirical analyses on the relationship between innovative SMEs and the creation of employment based on data from standard international data sources as well as from national and regional sources. Additionally, personal interviews shall be performed with private market operators, representative bodies, and public bodies from the member states of the European Union in order to present the opinion of key actors on current support initiatives and to make suggestions for possible improvements to be adopted by public authorities in this field. Finally, the project will identify and present some positive examples of employment created by innovative small and medium sized enterprises by means of selected case studies and will draw conclusions and suggestions from corresponding findings towards support policies for innovative SMEs as a tool to create employment. Introduction Technological change has greatly altered the demand for workers skills. Many tasks once carried out manually are now performed by automated equipment. Additionally, as information-based technologies, such as computers and sophisticated machine tools, become more widespread the demand for certain skills may disappear, while the demand for workers able to maintain, use, and develop these technologies rises. There is therefore concern that technological change may increase the polarisation of society by widening the gap in income and employment opportunities between those whose skills have been displaced by new technologies and those who create and use it. The principal reason for the increased concern over how technological change alters the demand for various skills is the sharp decline in the demand for low-skilled workers, combined with an increase in the demand for highly skilled labour observed in most OECD countries. As there is widespread recognition that especially SMEs contribute intensively to employment within the European Union ( 2 ), and furthermore play an increasingly important role in the production and implementation of innovation ( 3 ), the importance of the impact of innovation in SMEs on the skill level of jobs created gets even more striking. With this regard it is the intention of the underlying presentation report to further contribute to the knowledge on the basic linkages between technology and skills, to present recent empirical findings on the impact of innovation on the skill level of jobs, especially with reference to SMEs, and to draw respective conclusions. 1 European Commission (2000a) European Commission (2000b) OECD (1996a)

4 The Relationship between Technology and Skills When new technologies are introduced into production processes, it is generally thought that they reduce the demand for low-skilled workers and increase the demand for high-skilled workers. A theoretical model dealing with the effects of innovation on the skill level of employment does not seem to be available. A positive relation between technological progress and the demand for high-skilled workers at the level of the firm, however, can be explained by reference to at least three arguments ( 4 ): The first is that high-skilled workers adapt more easily to technological change than low-skilled workers. The second is based on the observation that some new technologies perform repetitive tasks traditionally carried out by low-skilled labour or workers without extensive training. The third argument is that computer technologies increase the productivity of high-skilled workers more than of low-skilled workers, so that firms match high-skilled workers with new technologies. However, at the same time, and in addition to this upskilling, technology can also have a deskilling effect, in the sense that it might lower the skills required to perform certain tasks. There is, for example, some recent evidence that information technology reduces middlemanagement jobs, traditionally thought of as skilled ( 5 ). With the development of intelligent software able to perform a variety of functions, information technology can now be used to conduct many information gathering tasks and analyses in addition to simple computation, formerly done by skilled workers. Box 1: What is skill-bias? The notion of bias in technical change derives from the theory of economic growth and originally concerns the capital/labour relationship of production. Technical change is said to be biased (as opposed to neutral), if it entails, under some conditions, changes among factors in the distribution of income. In the current debate the use of this concept has departed from its origin and is applied to the different skill levels of employment. Suppose, for example, that there are two factors, skilled and unskilled labour, each associated with a certain technology. If technological change improves one technology, lets say the one used by skilled workers, more than the one used by unskilled workers then it is called skill-biased. Source: OECD (1996c) Review of Empirical Results The impact of technology on the demand for different skill levels of labour is controversely discussed throughout the literature. Various empirical studies have shown that new technology favours highly skilled labour and substitutes low-skilled labour. 6 A phenomenon called skill biased technological change (see Box 1), which is often considered the main reason for the decline in relative demand for low-skilled labour observed in most OECD countries. However, while most of these studies refer to the aggregate level, only little is known about shifting labour demand due to innovation and technology within individual firms, especially within small and medium sized enterprises. Studies covering this subject have only been conducted in Austria, Germany, and the Netherlands, so far. Falk (1999) is one of the few who analyses the impact of technological innovations on employment of different types of labour (see Box 2) by firm size. In his analysis for the manufacturing sector in West Germany he interviewed about 800 firm managers whether they plan to increase employment of persons with an university degree, of masters and technicians or the total number of employees in the period 1997 to The empirical results suggest that employment expectations differ significantly between innovating and non-innovating enterprises. Results, however, vary by type of innovation measure and the educational qualification required (see Table 1). 4 5 OECD (1996b) See for example OECD (1996b) -2-6 For a comprehensive overview of the most relevant studies see for example OECD (1996c).

5 Table 1: Employment growth expectations for innovating and non-innovating enterprises in West Germany between 1997 and 1999, applying different innovation measures percentages of enterprises with demand for innovation measure university graduates masters/technicians total employment innovating innovating noninnovating noninnovating innovating noninnovating product innovations product and process innovations product and cost red. process inno new products with pos. revenues new market products expected sales growth patent applications Source: Falk (1999) Falk (1999) finds that, in general, innovative firms have higher employment expectations than non-innovative firms. In particular, job creation for university graduates is actually more common in innovative enterprises: between 49 % and 57 % of these firms expect employment to increase, depending on the type of innovation measure. For non-innovative enterprises, only between 21 % and 33 % expect employment of university graduates to increase. Similar to university graduates, employment expectations for masters and technicians differ between innovative and non-innovative enterprises. For new market products, for example, which have proven to be more significant than any other measure of product innovation in determining expected employment probabilities, 39 % of the innovative enterprises plan to create new jobs for masters and technicians for the period 1997 to 1999, compared to only 26 % within the group of non-innovative firms (see Graph 1). Furthermore, Falk (1999) finds that job creation for university graduates is much more likely in medium sized ( employees) and in large enterprises than in both, very small (up to 50 employees) and small (50-99 employees) firms. Expectations for total employment, on the contrary, are clearly negatively related to firm size. The highest employment expectations for masters and technicians can be found in medium sized enterprises Although not taking account for size-class effects, Kaiser (1998) finds in a similar analysis for Germany, that a shift towards highly skilled labour is also present within business related services, an increasingly important sector in most western European economies. The author yields from his investigation of firms belonging to sectors, such as transport, consultancy, software, and other business services evidence for shifting employment patterns in business related services due to the implementation of new technologies. Kaiser (1998) shows that the share of investment in information and communication technologies (IT) in total investment influences expected labour demand quite differently across skill groups: It has a significantly positive impact on highly skilled labour, such as university graduates and a significantly negative impact on skilled labour. Box 2: Skills and how to measure them The term skill refers to the qualifications needed to perform certain tasks in the labour market. In the most general sense, it reflects the level of human capital, and upskilling can be seen as synonymous for human capital development. In empirical work, researchers often use proxies based on education and occupation. Education is usually defined by years of schooling or degree obtained and is not adjusted for quality. Occupations sometimes provide more information on the skills of workers, but measures vary considerably across countries and may be ambiguous. These measures do not necessarily take into account onthe-job-learning and skills associated with the use of new technologies. In practice, most empirical work which attempts to assess the evolution of skills uses crude proxies such as the ratio of production and nonproduction workers, that of blue- and white-collar workers, or the share of the workforce with a higher education. Source: OECD (1996c) -3-

6 Graph 1: Demand for university graduates, masters and technicians, and total employment in West German enterprises, percentages of enterprises university graduates innovating firms Source: Falk (1999), modified masters/ technicians total employment non-innovating firms The author concludes that highly skilled labour is needed to implement new information technologies in a firm, which are then used to replace skilled labour. Investment in information and communication technologies, however, does not seem to influence the demand for unskilled labour. Total investment, in turn, shows a significantly negative effect on the demand for unskilled labour pointing at a substitutive relation between unskilled labour and capital. For unskilled labour, only the total amount of investment, not the distribution of investment across different types of investment seems to matter. Neither total, nor investment in information technologies have found to have a significant effect on the demand for technically skilled labour. Summarising it may be concluded that the larger the share of IT investment in total investment, the higher is the probability of increased employment figures for highly skilled labour, i.e. for university graduates, and the lower is the probability of increased employment figures for skilled workers. Total investment, on the contrary, turns out to be complementary to technically skilled labour and substitutive to unskilled labour. The effect of innovation on the demand for different types of labour and the need for skills has also been analysed in Austria by Leo and Steiner (1995). In their survey carried out in 1990 the authors asked 600 industrial enterprises from the Austrian manufacturing sector whether the demand for different types of labour increased, decreased, or remained constant following the introduction of an innovation. Additionally, firms had to indicate whether these innovations increased, decreased, or did not change the level of qualification of different types of labour. Leo and Steiner (1995) find that looking at the balance of firms which want to increase or decrease employment (= percentage of firms indicating an increase in employment minus percentage of firms indicating a decrease in employment) the introduction of an innovation leads to substantial increases in the demand for technicians (35.3 %), skilled workers (31.5 %), researchers (19.5 %), and high level experts (28.2 %). On the other hand demand declines for workers with on-the-job training (-1.6 %), support workers (-14.8 %), and for typists and similar supporting staff (-9.8 %) (see Graph 2). Both of these effects, the need for additional highly educated employees as well as the expected decline in the number of supporting workers is found to increase with firm size. Box 3: Summary of empirical findings Employment expectations for university graduates, masters and technicians are significantly higher in innovative firms compared to non-innovative firms in manufacturing (Source: Falk (1999)). Job creation for university graduates is much more likely in medium and large sized enterprises than in very small and small firms. The highest employment expectations for masters and technicians are found in medium sized enterprises (Source: Falk (1999)). Investment in information technologies favours university graduates and substitutes skilled labour while total investment complements technically skilled labour and substitutes unskilled labour in business related services (Source: Kaiser (1998)). Innovation tends to increase the need for highly skilled workers (technicians, skilled workers, researchers, and high level experts) and to decrease the need for low-skilled workers (workers with onthe-job training, support workers, and typists and similar support staff). These effects increase with firm size (Source: Leo and Steiner (1995)). The higher the degree of innovativity of a small and medium sized enterprise the higher is the share of technically skilled workers in total employment. Less innovative SMEs, on the contrary, show a comparably higher share of unskilled workers (Source: Lettmayr at al. (1997)). Enterprises with a high R&D-intensity tend to have jobs of better quality. This concerns the share of highly educated personnel, the share of personnel participating in training courses, internal mobility of employees, and employer s judgement whether the firm s employees have attractive labour conditions (Source: Brouwer and Kleinknecht (1994)). -4-

7 Graph 2: Balance of firms that want to increase employment in Austrian manufacturing, balance of firms *) technicians skilled workers researchers high-level experts workers with onthe-job-training support workers typists and supporting staff *) percentage of firms indicating an increase in employment minus percentage of firms indicating a decrease in employment Source: Leo and Steiner (1995) Similar results for Austria are obtained by Lettmayr et al. (1997). Based on survey data from 250 Austrian small and medium sized enterprises from five technology oriented sectors (computer and office machinery, chemical and plastic products, electrical equipment, technical services, and software and telecommunications) the authors find that innovative enterprises offer a significantly higher share of highly skilled technical jobs, e.g. for university graduates, compared to less innovative firms (see Table 2). Regarding the highest skill level of employees there is hardly any difference observable between innovative and non-innovative enterprises. Innovative SMEs, however, seem to employ more frequently university graduates of technical studies. As far as high school graduates and skilled workers are concerned, innovative enterprises (medium and high innovativity) show higher percentages compared to non-innovative enterprises. The most striking differences, however, can be observed for the group of technically skilled workers. The higher the degree of innovativity of an enterprise the higher is the share of technically skilled workers in total employment. Less innovative firms, on the contrary, have a comparatively high share of unskilled workers. An analysis of the impact of innovation on the quality of work has also been conducted by Brouwer and Kleinknecht (1994) for the Netherlands. In this study the quality of work has been proxied by four different indicators: a) the percentage of highly educated personnel b) the percentage of personnel that participated in man power training courses c) the internal mobility of employees (i.e. the probability that a person in a firm moves to a different department or gets a different function) and d) the employer s judgement whether the firm s employees have attractive labour conditions. The results obtained by the authors from panel data of enterprises from all sectors of the Dutch economy (including non-commercial and governmental services) suggest that innovative enterprises with a high R&D intensity (R&D person years as percentage of total employment) tend to have jobs of better quality compared to non-innovative enterprises according to all above indicators. A summary of all empirical findings is given in Box 3. Lettmayr et al. (1997) also find that the qualificational structure of employees in less innovative enterprises hardly changed during the period 1991 to 1996, while in innovative enterprises it underwent a comparatively strong change. The share of unskilled workers decreased distinctly, while the relevance of all other qualificational levels - with the exemption of high school graduates - increased. -5-

8 Table 2: Share of employment within Austrian SMEs by qualification level and degree of innovativity in 1997 qualification highly innovative medium innovative less innovative university graduates of technical studies university graduates of other studies high school graduates skilled workers technically skilled workers low-skilled workers apprentices total Source: Lettmayr et al. (1997) Conclusion It is widely accepted that the development and diffusion of new technologies and innovation are central to the growth of output, productivity and employment within the European Union. More recent evidence suggests that, in particular, new or small firms play an increasingly important role in the production and implementation of innovation, due to their flexibility and capability to quicker respond to changing market conditions. However, despite enormous efforts made in theoretical and empirical research, literature shows that the impact of innovative small and medium sized enterprises (SMEs) on employment growth as well as on the skill level of jobs created are far from being clear-cut. While it seems quite well established by recent findings from the first interim report of this project that innovation has a positive (quantitative) effect on employment creation, there exists some evidence that this effect decreases with firm size, meaning that the impact of innovation on employment growth is more pronounced in small and medium sized than in large enterprises, both, in manufacturing as well as in services. The contrary, however, seems to be the case with regard to the (qualitative) impact of innovation on the skill level of employment. In general, the introduction of innovation has shown to improve the qualificational level of employment, in the sense that it favours highly skilled labour and promotes the substitution of unskilled labour. This confirms the existence of a skill bias in technological change. But in contrary to the quantitative impact of innovation on employment, which seems to decrease with firm size, there exists some evidence that the higher demand for highly skilled workers and the lower need for low-skilled workers within innovative firms is more pronounced in larger enterprises than in smaller ones and increases with the size of the enterprise. Thus, summing up empirical findings, it may be concluded that while total employment creation has found to be higher within smaller innovative firms, job creation for highly skilled labour, such as, for example, university graduates seems higher in innovative medium and large sized enterprises. -6-

9 References Brouwer, N.M./Kleinknecht, A.H.: Tech Technologie, werkgelegenheid, winsten en lonen in Nederlandse bedrijven: een microeconometrische analyse (Technology, employment, profits and wages in Dutch enterprises), Research report, Organisation for Strategic Labour Market Research (OSA), The Hague, Falk, M.: Technological innovations and the expected demand for skilled labour at the firm level, Centre for European Economic Research (ZEW), Mannheim, European Commission: Communication from the Commission to the Council and the European Parliament, COM (2000a) 567 final, Brussels, 20/09/2000. European Commission: The European Observatory for SMEs, Sixth Report, Luxembourg 2000b. 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, Kaiser, U.: The impact of new technologies on the demand for heterogeneous labour: Empirical evidence from the German business-related service sector, Centre for European Economic Research (ZEW), Mannheim, OECD: SMEs: Employment, innovation and growth, The Washington workshop, Organisation for Economic Co-operation and Development (OECD), Paris: OECD, 1996a. OECD: Technology and industrial performance. Technology diffusion, productivity, employment and skills international competitiveness, Organisation for Economic Co-operation and Development (OECD), Paris: OECD, 1996b. OECD: Technology, productivity and job creation, Vol. 2 Analytical report, Organisation for Economic Cooperation and Development (OECD), Paris: OECD, 1996c.