The Impact of Innovation on Employment in Small and Medium Enterprises with Different Growth Rates

Using information on almost 12.000 firms this article examines the impact of innovation on employment growth in innovating small and medium enterprises. In contrast to existing studies, which typically use the least squares estimation technique, quantile regressions were carried out to analyse the data. This method allows one to examine the effects of innovation at any desired point in the distribution function – for example, in firms experiencing positive or negative growth – providing a more complete picture of the relationship between innovation and employment growth than by the standard method of viewing deviations in the average effect. The key finding of the study is that innovation has a positive effect on employment in both growing and shrinking small and medium enterprises. In addition, innovation has a much stronger impact on employee headcounts in companies that are already experiencing strong growth than in their slower growing or shrinking counterparts. When differentiating between product and process innovations, the analysis shows that the introduction of new or improved processes has a larger impact on employment than product innovations. Thus, positive employment effects of innovations are not restricted to narrow segments of the economy. Economic policy aimed at bolstering the innovative strength of firms is thus a strong encouragement to employment on a broad basis.

Zimmermann, Volker (2008), The Impact of Innovation on Employment in Small and Medium Enterprises with Different Growth Rates, ZEW Discussion Paper No. 08-134, Mannheim.