Innovation and employment growth in developing countries: the role of market structure

Abstract

ABSTRACT This study explores the relationship between product and process innovation and employment growth using a dataset of 17,103 firms in 53 developing countries. Employing instrumental variable (IV) estimation, we find that product innovation plays a significant role in driving employment growth in developing countries. Meanwhile, the impact of process innovation on employment appears to be limited. Moreover, we find that the employment effects of product innovation vary substantially depending on the market structure. In particular, within the manufacturing sector, product innovation has a more pronounced, positive effect on employment growth at firms with fewer competitors than at their counterparts operating in more competitive environments. Similar effects are observed in the service sector, where heterogeneity is prevalent, primarily within comparable industries such as retail and wholesale trade. These findings emphasize that employment effects innovation are not solely firm-determined but also depend on market conditions and competitors.