The effect of external innovation on firm employment

This paper analyses the effects of product innovations introduced by firms in upstream and downstream sectors and firms in the same sector on firm employment. To this end, we extend the Harrison et al. (2014. “Does Innovation Stimulate Employment? A Firm-Level Analysis Using Comparable Micro-Data from Four European Countries.” International Journal of Industrial Organization 35 (1): 29–43) model and analyse the relationship between firm innovation and employment to account for innovation in the same and related sectors. We employ panel data for the innovation activities of Spanish firms together with input–output data. The results show that product innovation by firms in the same sector harms the firm's employment. We also find a negative effect on employment for the introduction of new products in upstream sectors, which results in the reduction of labour in the focal firm. The type of labour that is negatively affected by innovations introduced by both same-sector and upstream firms is low-skilled. No significant effects are found for innovations introduced in downstream industries.