The Employment Effect of Innovation: Evidence from Bangladesh and Pakistan

The analysis of the impact of innovation on employment growthis an important topic for policy-makers. Unemployment is an importantsocial topic, and the effects of innovation on employment are oftenpoorly understood. Despite the significance of this relationship, veryfew studies on this topic are yet available for developing countriescompared with the developed ones. This paper contributes to this scantliterature by investigating the employment effects of innovation for twoSouth Asian developing countries: Bangladesh and Pakistan. We furtheranalyse whether this relationship shows country-specific andindustry-specific differences. Our analysis shows that both product andprocess innovation spur employment in this region as a whole, in bothlow-tech and high-tech industries, even after controlling for a numberof firm-specific characteristics. Moreover, although both innovationtypes also have significant, positive impacts on employment growth ofall Bangladeshi and of all Pakistani firms separately, they areimportant factors for employment growth of only high-tech Bangladeshifirms and of only low-tech Pakistani firms. Contrary to most previousstudies, we witness an insignificant effect of growth of labour cost onemployment growth, perhaps due to the availability of cheaper labourforce compared with the developed countries. We notice that some of theinnovation determinants exert different influences across industries andacross both countries. The same holds true for the determinants ofemployment growth. JEL Classification: J23, O31, O33 Keywords:Bangladesh, Employment Growth, Pakistan, Product Innovation, ProcessInnovation