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Innovations, growth, and employment: Policy implications

On the basis of the analysis presented in the paper on growth, only fairly general policy implications can be drawn since the paper is primarily theoretical. Cautious interpretation is called for.

The Systems of Innovations approach seeks to identify the sources and determinants of innovation. So far this approach has not had much to say about how innovations translate into economic growth; it is more a theory of innovation than a theory of growth. The so-called ‘new growth theory’, on the other hand, has only a primitive and biased way of treating technical and organisational innovation. A ‘complete’ growth theory should include a sub theory of the sources and processes of innovation as well as one of how innovation induces growth. This is simply because innovation is the most important source of productivity growth. Therefore, the systems of innovation approach may be seen as a complement rather than a substitute vis-a-vis new growth theory.

Formal growth models have always been built without giving much thought to the institutional framework of the economy. Endogenous institutional change is much more difficult to model than endogenous technical change and this has induced a bias and flaw into production function centred formal growth theory. The main contribution from the systems of innovation approach to growth theory lies in its emphasis on the importance of institutions and institutional change and especially in the focus on interactions between institutional, organisational, and technical change as the basic source of growth.

Therefore, the main policy implications are that the most important thing is to get the institutions right in a policy of stimulating growth. Designing and implementing changes which continuously support technical and organisational learning and innovation is the same thing as a more or less permanent process of institutional learning. With this as a guide-post, it is crucial to study in detail the role of various specific institutions - like laws, norms, rules and routines - for innovation, and thereby for growth. Institutional ‘framework conditions’ are crucial.

For policy-makers, who try to stimulate growth by supporting innovations, the focus should be on designing and implementing institutional changes that continuously support technical and organisational learning and innovation, i.e. they should try to implement a more or less permanent process of institutional learning.

The implications of the scientific findings for government policy with regard to innovations and employment can be summarised in the following points.

- Employment policies need to reflect the differences between those sectors highly concentrated on process innovations and those highly concentrated on product innovations. If a country (time period, firm, or region) is characterised mainly by process innovations (technological or organisational), the tendency is for employment to decrease. If product innovations dominate, there is an opposite tendency of increasing employment.

- A reallocation of resources from process to product innovation will generally have positive employment effects. An example is policy that identifies and strengthens those manufacturing and service sectors where product innovation dominates over process innovation, namely those with a high R&D (knowledge) intensity. Such a policy would support structural change in the economy in the direction of new sectors. (On the whole, these sectors are characterised by higher productivity and higher productivity growth, and therefore can carry higher wages and profits. They are also characterised by more rapid market growth than are other products.) Such a policy of structural change would increase employment in the long run.

- However, technological and organisational process innovations should not be stopped or hindered in any firm, region, or country. While employment problems can be solved by decreasing productivity in the short term, in the longer run such a policy would have devastating consequences. Productivity growth is the main source of increased material
welfare, and competitiveness (of the firm, region or country) depends on productivity growth. Those that attempt to avoid process innovations will end up lagging behind, with deteriorated prospects for gaining material welfare.

- Any policy that gives priority to employment generation over productivity growth by preventing process innovation will fail, partly because competition normally requires that potential increases in labour productivity be exploited in the long run.

- Policies for increased employment should—ceteris paribus—support more capital-saving types of organisational process innovations rather than more labour-saving ones.

As Europe seems to have become locked into a technological trajectory or growth pattern that is predominantly labour-saving, the employment intensity of growth is relatively low. For this reason, a policy supporting structural change in the direction of more R&D-intensive and less process innovation oriented sectors is called for more in Europe than in the United States and Japan. The present European trajectory will lead to increasing competition with Eastern Europe and advanced developing countries. This trend has continued for at least two decades without being corrected by market forces. There is thus a strong justification for considering policy intervention.

Government policy in this field should be thought of as a matter of emphasis between supporting process innovations and supporting product innovations. More specifically, policy can attempt to dissolve situations of lock-in into sectors dominated by process innovations and to facilitate (or support) structural change in the direction of sectors where product innovations dominate. Stimulating R&D-intensive and less process-oriented industrial sectors is important. Stimulating service sectors with a high level of product innovation and those with relations to innovative manufacturing sectors is also important. Governments faced with an economy with an employment problem should consider these options.

Reported by

Linkoping University
581 83 Linkoping
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