On the other hand, at the level of the enterprise, neither employment growth nor the proclivity to innovate is positively correlated, given the controls in our framework, with the self-reported number of competing firms or presence of a foreign competitor. Evidently, while more activelycompeting firms may mean that there are more sales in the market that the enterprise may aspire to divert through innovation-driven growth, the fact that these firms are identified as competitors signifies that there is active resistance to such diversion, and the result is on net no stimulus to the incentives for innovation.

# **2. Conceptual framework**

In recent years, a large number of countries have actively sought to promote innovation policies to enhance long-run productivity, international competitiveness and economic growth.<sup>5</sup> Although innovation is considered vital for firm survival and a nation‘s economic well-being, especially in the context of the globalized economy, careful and persuasive empirical evaluation of the actual impacts of innovation policies is still largely lacking. One area in particular that has not received sufficient empirical attention is the potential link between innovation and employment, especially in developing countries. Vital empirical questions arise here because of the revolutionary technological changes in several sectors of the global economy and the persistently high rates of unemployment that have plagued advanced industrial and developing countries alike.

It has long been recognized that innovation impacts employment through multiple channels of varying time scales and complexity, and that the overall effect is sensitive to the character of innovation (process versus product, radical versus incremental, etc.) and its setting. While economic theory does not generate unambiguous predictions for this relationship, many particular effects and insights can be articulated.

Process innovation can lead to productivity gains which enable firms to produce the same level of output with fewer inputs, or more output with the same inputs. Thus, process innovation can have direct labor-saving impacts ( ̳displacement effects‘). These negative effects of process innovation on employment can be counterbalanced by indirect expansion impacts when the cost reductions from the innovation spur price reductions to drive higher demand and greater output ( ̳compensation effects‘). The employment effects of product innovation, on the other hand, are

> 5 The _OECD Reviews of Innovation Policy_ offer a comprehensive assessment of the innovation system of individual OECD member and non-member countries, focusing on the role of government. They provide concrete recommendations on how to improve policies which impact on innovation performance.  Reviews in this series include: Russian Federation (published June 2011), Mexico (October 2009), South Korea (July 2009), Hungary (October 2008), China (September 2008), Norway (July 2008), Chile (November 2007), South Africa (September 2007), New Zealand (September 2007), Luxembourg (May 2007), and Switzerland (December 2006). For India see Dutz (2007), for Brazil see Rodriguez et al. (2008).

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