Employment dynamics, firm performance and innovation persistence in the context of differentiated innovation types: evidence from Luxembourg

This doctoral dissertation examines the essential topics of employment dynamics, firm performance and innovation persistence comprehensively. In particular, this doctoral dissertation provides an assessment of the differentiated role of innovation strategies in employment, firm performance and innovation persistence. After an introduction, the second chapter studies the dynamic relationship between technological innovation and employment using Luxembourgish firm level data pertaining to the non-financial corporate sector during the period 2003-2012. A simple theoretical model that distinguishes the employment effect of product innovation from that of process innovation is developed. The model is then estimated by two-step generalised method of moments using an unbalanced panel data stemming from the annual structural business survey merged with the biennial innovation survey. The third chapter investigates the two-way relationship between technological innovation and firm performance at the firm level. In the framework of evolutionary economics, innovation is regarded as a highly cumulative process which exhibits positive feedback. This chapter aims at capturing the interdependent relationship and possible bidirectional causality between innovation and firm performance. Superior firm performance facilitates the emergence of innovations, innovation contributes to firm performance by gaining successful and sustainable competitive advantage, which forms a virtuous circle. A fully recursive simultaneous model is established where product and process innovation are explicitly distinguished. The system of simultaneous equations with mixed structure is estimated by full information maximum likelihood methods. The longitudinal firm-level data is applied over the 2003-2012 period by merging five waves of the Luxembourgish innovation survey with structural business surveys. The fourth chapter explores innovation persistence at the firm level by means of dynamic nonlinear random effects models based on the estimator proposed by Albarrán et al. [2015]. It aims at capturing the true state dependence which indicates the causal relationship between innovation in one period and decision to innovate in the subsequent period. The Albarrán et al. [2015] method accounts for unobserved individual effects that are correlated with the initial conditions as well as the unbalanced structure of panel. Using five questionnaire waves of Luxembourgish Community Innovation Surveys (CIS) for the years 2002-2012, this study provides new insights on the differentiated patterns of persistence among product and process innovation. This doctoral dissertation explicitly distinguishes different mechanisms of product and process innovation and reveals their distinct impacts on employment. Product innovation is found to exert a positive effect on employment where the process innovation does not exert a significant effect on the firm level of employment. This doctoral dissertation also reveals that enhanced firm performance facilitates process innovation and process innovation improves firm performance, which forms a self-reinforcing virtuous circle. An opposite pattern is identified for the product innovation on the ground of cannibalization effect and inherent market risks associated with new products. Moreover, results highlight the relevance of innovation persistence for all types of innovation, particularly the highest level of persistence is found for product innovation. In addition, the state dependence of product innovation is mainly associated with sunk costs relevant to R&D expenditures, whereas the state dependence of process innovation can be attributed to other factors such as dynamic increasing returns and learning effect. The further differentiation of product innovator category reveals that the state dependence of incremental product innovation can be mainly attributed to sunk costs relevant to R&D expenditures. In contrast, the joint significance of average R&D intensity, intramural R&D share as well as the past realization of radical product innovation suggests the role of other factors such as dynamic increasing returns and learning effect in fostering state dependence for radical innovations. This doctoral dissertation also appears to have far-reaching economic, managerial and policy implications. Policy makers should aim to encourage companies to undertake innovation activities, particularly, product innovations as a constant driver of national employment growth. This dissertation also emphasizes the self-reinforcing mechanism in determining the innovation-performance trajectory. Policy makers should implement support instruments and funding schemes to stimulate innovation and foster a virtuous circle between innovation and firm performance. In case of true state dependence of innovation persistence, innovation policy not only affects current innovation but also all future innovation activities. Therefore, it is crucial to spur the undertaking of the initial innovation activity and remove barriers to innovation for initial innovators.