LAHORE: A company’s growth is an important dynamic underlying the process of structural change in developing countries.
The transition of a company from a smaller to a larger size typically involves technological upgrade towards higher value-added activities and exploitation of the economies of scale. In the process, the growing firms generate employment opportunities for the young labour force that enters the market in big numbers in developing countries.
For these reasons, policies for creating jobs, promoting entrepreneurship and growth are a key priority for many developing economies. However, designing and implementing reforms is particularly challenging as policymakers attempt to strike a balance across sectors, company sizes and incentives that can sustain growth in a rapidly changing landscape of the global economy.
Recent findings from a wide range of countries have indicated that most of the job creation could be attributed to only a very small number of fast-growing firms, called high-growth firms or ‘gazelles’.
A recent World Bank report – High-Growth Firms: Facts, Fiction and Policy Options for Emerging Economies – found that high-growth firms account for approximately 3-20% of manufacturing and service industries but they generate more than 50% of new jobs in these sectors.
Who are high-growth firms?
The traditional company growth literature provides rich theoretical and empirical evidence that younger and smaller firms grow faster than older and larger firms, and that innovation is the engine of sustained growth.
More recently, the focus of attention has been on the interaction of firm-level size-age-innovation characteristics. In particular, the age of a firm plays a moderating role in the relationship between innovation and employment growth.
An emerging avenue of research conceptualises Young Innovative Companies (YICs), defined as firms that combine smallness, newness and high research and development (R&D) intensity/innovation, and finds them to be exhibiting superior innovation and employment growth performance, making them an appropriate focus for designing public policies.
Drivers of employment growth
In a recent study (Young Innovative Companies and Employment Creation, Evidence from the Pakistani Textile Sector), we investigated the distinguishing features of fast growing firms in the textile and apparel sectors.
We found that employment growth in these sectors is generated by only a small number of firms. Second, innovation plays the most important role in employment creation. Third, YICs demonstrate superior employment creation in comparison to other innovative firms.
This is interesting given that innovation in developing countries is generally described as incremental in nature and is closely related to the development of technological capabilities to catch up with frontier technologies.
YICs are more intensively engaged in innovation and are introducing more radical innovations, which explain their superior employment creation.
Fourth, while the self-reported technological innovation is useful to distinguish between active innovative firms and non-innovators, performing R&D in-house on a continued basis and with higher intensities are better indicators related to employment creation, especially for smaller and younger companies.
Fifth, the innovative firms not only display higher employment growth, but they also create more jobs in absolute terms.
Correlates of innovation?
Since innovation plays a pivotal role in employment creation, another important question will be what explains the innovation performance of firms.
In a study (Innovation and Firm Performance in Developing Countries: The Case of Pakistani Textile and Apparel Manufacturers), we found that vertical knowledge flows from foreign clients and suppliers are important determinants of a firm’s decision to innovate.
Second, larger firms are more likely to engage in innovation, however, there is no significant evidence that they invest more in innovation. Third, export is positively associated with innovation, and the firms exporting to Europe and the US are more likely to engage in innovation.
Fourth, foreign competition adversely affects a firm’s decision to innovate whereas local competition increases investment in innovation. Fifth, subsidies seem to have a crowding out effect, ie, the firms receiving national subsides invest less in innovation.
Finally, the firms that have higher investment in innovation, that are more productive and that introduce organisational innovations, have higher innovation intensity.
Innovation and entrepreneurship is extremely understudied in Pakistan. There is a need to establish a national innovation system that records, promotes and facilitates the flow of technology and information among people, enterprises and institutions.
Second, knowledge flows from universities and public research institutions to the industry are completely absent. There is a need to improve government-academia-industry linkages to promote innovation.
One such initiative could be a conditional R&D support for the academia and industry – conditional upon working together to introduce industry-oriented solutions and innovations.
Third, policy targeting young innovative companies may be an effective strategy to generate more and quality employment. Fourth, job training that facilitates multi-tasking is crucial for both the employees to retain jobs when there is automation, and for the firms to not lose productivity when new products are introduced.
Finally, Pakistani firms are not competitive in the international market. There is a need to promote innovation that upgrades Pakistani products in the global value chain.
The writer is a Senior Research Fellow, Centre for Research in Economics and Business, Lahore School of Economics
Published in The Express Tribune, September 30th, 2019.