Innovation, Employment Growth, and Foreign Ownership of Firms - A European Perspective

Subsidiaries of foreign multinational enterprises (MNEs) are among the top performers of research, development and innovation in many EU and non-EU countries. In some small European countries - examples are Austria, Belgium, the Czech Republic, Hungary or Ireland - foreign-owned firms even account for more than 50% of total business expenditure for R&D.

The high relevance of foreign ownership for technology and innovation policy calls for a sound understanding of the innovation behaviour of foreign-owned firms and its impact on economic performance. Using the theoretical model of Harrison, Jaumandreu, Mairesse and Peters (2008), this paper contributes to the existing literature by disentangling sources of employment growth by ownership, and it particularly investigates the role product and process innovation play for employment in foreign-owned and domestically owned firms. We examine the link between innovation and employment using a large data set (Community Innovation Surveys CIS4) of more than 64,500 firms from 16 European countries.

Previous studies have shown that innovation and technology are key dimensions in which foreign-owned and domestically owned firms differ. There is ample evidence that MNEs tend to possess superior firm-specific assets, operate more frequently in R&D-intensive sectors and employ more highly-qualified staff than domestically owned firms. Both groups also differ in their capabilities to create new products and in their ability to successfully introduce innovations to the market. Our analyses enlighten that these differences, in turn, lead to differences in employment creation and destruction from innovation between the two groups.

Previous studies have shown that innovation and technology are key dimensions in which foreign-owned and domestically owned firms differ. There is ample evidence that MNEs tend to possess superior firm-specific assets, operate more frequently in R&D-intensive sectors and employ more highly-qualified staff than domestically owned firms. Both groups also differ in their capabilities to create new products and in their ability to successfully introduce innovations to the market. Our analyses enlighten that these differences, in turn, lead to differences in employment creation and destruction from innovation between the two groups.

We find that foreign-owned firms experience higher employment losses than domestically owned firms due to general (non-innovation related) productivity improvements and in manufacturing also partly due to process innovation. A likely explanation for this finding is that foreign-owned firms that introduce new processes adopt superior technologies of their parent companies. In addition and in contrast to domestic firms, most foreign-owned firms are able to produce new products with a higher efficiency than existing products (except for European FOF in manufacturing). These larger productivity gains might be worrying as they imply that foreign-owned firms would need to create much more jobs with product innovation and existing products to meet the employment growth rate of domestically owned firms. Taking direct and indirect demand effects into account, our analysis reveals that the net contribution of product innovation to employment is positive, and it is indeed higher for foreign-owned firms than for domestic firms. This is primarily due to higher sales growth rates with new products which are likely to result from learning effects and larger market power. Together with the positive employment effect stemming from sales growth with old products, this leads in sum to an increase in employment in foreign-owned firms. However, it does not reach the employment growth figures for domestically owned firms.

Dachs, Bernhard and Bettina Peters (2013), Innovation, Employment Growth, and Foreign Ownership of Firms - A European Perspective, ZEW Discussion Paper No. 13-019, Mannheim, published in: Research Policy.