Complementarities between product and process innovation and their effects on employment: a firm-level analysis of manufacturing firms in Colombia

ABSTRACT

The introduction or adoption of innovations at the firm level has consequences for job creation that may differ across low-middle and high-income countries. Also, the type of innovation that firms introduce, such as process or product innovations, can affect employment through different channels. This paper aims to study the effects of innovation on employment growth at the firm level using a framework that considers the nature of innovation and the relative efficiency of the firms. The study uses a rich panel dataset that combines information from two different surveys in Colombia: the Annual Manufacturing Survey and the Survey on Development and Technological Innovation in the Manufacturing Sector. The article provides empirical evidence supporting the idea that the nature of innovation in the country involves complementarities between process and product innovations. The paper discusses how this result is related to the patterns of innovation in middle income countries, which need not only new technologies but also imitation of processes and products. Another novelty of this analysis is the study of displacement effects of process innovation through improvements in the relative efficiency of the firms. Findings show that some firms reduce employment from process innovations, reflecting high heterogeneity in efficiency among firms.

KEYWORDS:

• Employment
• firms
• innovation
• efficiency
• jobs
• management

JEL CLASSIFICATION:

• D2
• D240
• J23
• J21
• O14
• O31
• O33

Disclosure statement

I wish to acknowledge the Colombian Statistical Agency DANE for allowing me access to the EAM and EDIT surveys and the use of their data, and to their staff for technical support. I am grateful for the beneficial comments provided by the reviewer and the editor. My deepest gratitude to Professor Pasquale Scaramozzino, for his valuable guidance, constructive comments, advice and support through each stage of my research. A special mention goes to Professor Giovanni Trovato, from Tor Vergata University of Rome, who guided me through stochastic frontier analysis and econometric methods. I thank the International J.A. Schumpeter Society” for the Honorary Mention for the paper. Juana Paola Bustamante’s affiliation to WHO, where she is a labour economist, is provided for identification purposes only and does not constitute institutional endorsement. Any views and opinions expressed are hers alone and do not represent WHO.

Notes

1. Crepon, Duguet and Mairesse developed a three-step structural model on the relationship between innovation, output and productivity. The first step models the decision of firms to invest in R&D. The second step models the relationship between investment in R&D and the probability to be innovative, using a knowledge production function. The third step is the production function where productivity depends on innovation.

2. As discussed in Coelli et al. (2005, ch 8), if there are observations over time then one should include a time trend to explicitly account for changes in economic relationships, such as production functions, due to technological advances.

3. $B_0$ can be interpreted as the relative efficiency of the production of old and new products, see Supplementary Material Annex 1 on the Theoretical Model.

4. I test for different specifications and in all cases the Sargan- Hansen test p-value confirms the validity of the instruments, there is no rejection of the null hypothesis.

5. Output growth of new products $y_{2\mathit{i}}$ is not observed but nominal sales. The variable of nominal sales might be correlated with unanticipated shocks because data do not include price changes of sales at the firm level, and both output and prices are affected by movements in demand. This leads to endogeneity of g which could be correlated with the error term since prices changes are in the error term. Due to endogeneity issues applying Ordinary Least Squares (OLS) would result in biased estimates and would underestimate the true effect of product innovation.

6. The variable for cooperative agreements on innovation is a dummy variable indicating if the firm has established these agreements with one of the institutions in the National System of innovation.

7. Takes the value of 0 if the firm reports that the effect of the new or improved products or process (effect of innovation) has been irrelevant for broadening the range of goods and services, and 1 if it has had medium or high importance in the impact on broadening the range of products.

8. One of the reasons for this outcome could be that firms introducing only process innovations may have observed increased sales for old products due to price decreases. So the growth in sales of existing products compensates for possible improvements in labour productivity of old products due to process innovation.

9. $Z_{\mathit{score}}=\frac{{\alpha }_1-1}{\mathit{\theta }}$

10. For instance, Eslava et al. (2019) present evidence suggesting that there is a higher probability that less productive young firms in Colombia survive and continue in business, more commonly as compared to the USA.

¹ in which case process innovation can affect the efficiency of old and new products Hall et al. (2008)

² the estimates suggested no evidence of significant employment displacement effects from firms that only introduce process innovation since the coefficient for the dummy variable of process innovation was not statistically significant and therefore I did not include it in the final specification on equation 7

Additional information

Notes on contributors

Juana Paola Bustamante Izquierdo

Juana Paola Bustamante Izquierdo is an economist with a PhD in Economics, a master in Development Economics and a master in Environmental Economics. This paper is part of her PhD research. She has a strong background in economic analysis, research and policy advising in development economics, innovation, firm analysis and labour markets. She has worked at the international level with WHO, ILO and World Bank (IFC), and at the country level in Colombia at the Ministry of Labour and Social Security, Ministry of Finance and National Department of Planning.