A Survey of Theories and Empirical Evidence
Chapter 6: Innovation and Firm Growth
Innovation plays an increasingly important role in our modern economy, transforming it from within, and bringing about a tremendous amount of structural change and turbulence (Metcalfe, 1998). New sectors are born, new products and techniques replace their older counterparts, and some firms can harness the power of their innovations to experience spectacular growth, while less innovative firms appear to wither away and perish. The influence of innovation on firm growth has been of great interest to both theoretical and empirical scholars. However, as we will see in the rest of this chapter, the strong predictions emerging from theoretical work cannot easily be reconciled with the available empirical evidence. When discussing the relationship between innovation and firm growth, however, it is meaningful to distinguish between employment growth and sales growth. Employment growth is an input, while sales growth is an output. Innovation, it is anticipated, can lead to the production of a higher level of output through a more efficient use of inputs. Are firms becoming capable of producing more by hiring fewer workers? Perhaps worse, are workers being made unemployed, being replaced by machines? Firms and strategists are usually more concerned about the impact of innovation on sales growth or growth of profits, while economists and policy makers are more concerned about employment growth. Given the distinction between these two indicators, therefore, we will discuss them separately. Innovation and sales growth is discussed in section 6.1, while the relation between innovation and employment growth (also known as the ‘technological unemployment’...
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