Employment effect of innovation: microdata evidence from Bangladesh and Pakistan

The analysis of the impact of innovation on employment growth is an important topic for policy makers, because (un)employment is an important social topic, and the effects of innovation on employment are often poorly understood. Despite the significant importance of this relationship, very few studies on this topic for developing countries are yet available compared with developed ones. This paper contributes to this scanty literature by investigating the employment effect of innovation for two South Asian developing countries: Bangladesh and Pakistan. We further analyze whether this relationship shows country-specific and industry-specific differences. Finally, we investigate whether complementarity between process and product innovation exists or which effect (displacement or compensation) of one particular innovation type dominates the other, in order to influence employment. One of the striking findings of our analysis is that both product and process innovation spur employment in this region as a whole, regardless of low-tech and high-tech industries, even after controlling for a number of firm-specific characteristics. Moreover, although both innovation types also have significantly positive impacts on employment growth of all Bangladeshi and of all Pakistani firms separately, they are important factors for employment growth of only high-tech Bangladeshi firms and of only low-tech Pakistani firms. Moreover, we observe a strong complementarity between both innovation types in order to stimulate employment. Contrary to the most previous studies, we witness an insignificantly negative effect of labour cost on employment change, perhaps owing to the availability of labour force to hire at cheaper rates compared with developed countries. We notice that some of the innovation determinants exert different influences across industries and across both countries. The same is the case for the determinants of employment growth.