Dynamic analysis of the employment effect of innovation in different market structure: Korean manufacturing firms and sectors

Abstract

How does technological innovation impact job creation? While the influence of technological innovation on growth is relatively clear, but the discussion of its influence on job creation fails to cease. This is because while technological innovation has a substitution effect towards job creation, also a compensating effect through demand creation

while the compensating effect through demand creation of the firm is determined by the characteristics and the importance of the technological innovation, it is also partially determined by the market environment and the demand conditions to which the firm belongs. Therefore, the job creation effect of technological innovation has been examined through studies of empirical analyses rather than theoretical discussions, and studies at the firm-level have been used as the most basic study methods in the aspect that it allows for examination of the mechanism through which technological innovation impacts actual job creation.

Therefore, this study has utilized the Korean Innovation Study (KIS), gathered by the Science and Technology Policy Institute (STEPI) to support the making of better technological innovation support policies for job creation, and analyzed the influence of technological innovation of Korean manufacturing firms on job creation. The study model and analytical methods of Harrison et al. (2008, 2014) were utilized for a firm-level analysis, and the industry-level study methods of Greenan and Guellec (2000) were utilized jointly to overcome the limitations of firm-level analyses.

On the other hand, this study is different from previous studies in the following ways. First, this study has utilized approximately 10 years of large data of Korean manufacturing firms from 1999 to 2009 to jointly conduct firm-level and industry-level analyses, and the results were compared thereof. Secondly, the previous studies focused on the short-term job creation effects of technological innovation due to the limitations of research data whereas this study has formed separate panels of data by extracting the firms that continue to exist through each period and analyzed both the short- and long-term effects on job creation by technological innovation, despite its limitations. Lastly, the competitive effects in the product markets, only suggested in theory in previous studies, were applied in the empirical analysis, and the job creation effects of technological innovation depending on the market structure were expressly observed.

The results of the empirical analysis showed that first, the technological innovation of Korean manufacturing firms showed a short-term positive influence on the firm-level job creation, and second, these short-term job creation effects on the firm-level were confirmed to pass over to long-term job creation effects on the industry-level. Moreover, increasingly monopolistic market structures reduced the job creation effects of process innovation, and these observations imply the following considerations on countries that are striving for growth strategies similar to Korea.

First, the reason why technological innovation of Korea did not reduce jobs is not because the product innovation of Korea has a large job creation effect, but the process innovation of Korea did not work towards the direction of lowering the number of jobs for Korean manufacturing firms. Second, for highly-concentrated Korean manufacturing firms, the job creation substitution effect through process innovation should have been very large

the reason why this did not occur is because the environment that the Korean firms face is extremely competitive. Lastly, the reason why Korean manufacturing firms continue to create demand and jobs through process innovation is because they have price competitiveness through economies of scale, and continue to expand imports and constant foreign demand thereof.

Ultimately, the technological innovation of Korean manufacturing firms was successful in acquiring price competitiveness through economies of scale, and led to the successes in foreign demand creation in export markets, with an overall positive effect on job creation by Korean manufacturing firms. However, it seems inevitable that the job creation substitution effect through technological innovation would grow ever larger, if Korean manufacturing firms only seek to compete in the domestic markets, following the lowering of their influence in foreign export markets due to rapid advances by new emerging nations such as China. Therefore, this paper asserts that foreign demand creation through product innovation is the only response strategy to increase job creation for domestic manufacturing firms and to achieve this, the government should reinforce policy devices for fair competition to invigorate competition within the industry in the Korean markets, characterized by high aggregate concentration ratios.