석사학위 논문 지도교수 김병근

Innovation and Employment in Korean Service sectors

2011년 2월 한국기술교육대학교 대학원
기술경영학과 기술경영전공

박성근

2 0 1 1 · 2 박 성 근

석사학위 논문 지도교수 김 병 근

Innovation and Employment in Korean Service Sectors
한국의 서비스업에서 기술혁신이 고용에 미치는 영향 2011년 2월 한국기술교육대학교 대학원
기술경영학과 기술경영 전공

박성근

Innovation and Employment in Korean Service Sectors
한국의 서비스업에서 기술혁신이 고용에 미치는 영향 이 논문을 경영학 석사학위 논문으로 제출합니다

2011년 2월 한국기술교육대학교 대학원
기술경영 학과 기술경영 전공

박성근

박성근의 경영학 석사학위 논문을 인준함
심사위원장 심사위원 심사위원 옥주영 박규호 김병근 (인) (인) (인)

2011년 2월 한국기술교육대학교 대학원

Acknowledgements
멀리 돌아왔지만 마침내 제 자리를 찾도록 이 길로 부르신 하나님께 감 사와 영광을 올려 드립니다. 쉽지 않은 결정을 내리고 난 후의 네 학기동 안도 결코 쉽지는 않았지만 행복하였습니다. 지식의 위대함과 배움의 가 치를 다시금 일깨워주신 여러 교수님들과 열정 있는 동기들과 함께 공부 를 할 수 있어서 정말 행복한 시간들이었습니다. 넓은 식견과 안목으로 논문 작성하는 내내 친절한 “지도교수님”이 되 어 주시고 연구에 어려움을 겪을 때마다 힘과 용기를 북돋아 주셨던 김병 근 교수님께 특별한 사의를 표합니다. 학자로서, 스승으로서 좋은 본을 보 여 주셨습니다. 또한 유익한 코멘트를 해 주신 옥주영 교수님과 박규호 교수님, 연구방법론에 대해서 조언을 아끼지 않으신 조현정 교수님, 그리 고 친절하게 영문교정을 도와준 동료인 My Hanh과 Dorothy에게도 감사 의 말씀을 드립니다. 뒤늦게 석사과정에 입학하여 공부에 전념하게 되었을 때도 불초한 아 들에게 변함없는 신뢰와 응원을 해 주셨지만 뜻하지 않게 갑자기 별세하 신 선친께, 그리고 홀로되셨지만 아들을 항상 걱정해주시고 위해서 기도 해 주시는 어머님께 무한한 감사드립니다. 항상 자상하게 격려해주시고 힘을 주셨던 천안하나교회의 오병욱 담 임목사님과 청년회 시절부터 오랜 스승이시며 믿음의 동지이신 조종만 목 사님께도 감사의 말씀을 전해 드립니다. 힘들 때마다 저를 미소 짓게 만들고 힘이 샘솟게 만들어주는 사랑하 는 저의 딸 영주와 저를 닮은 귀여운 아들 하람, 그리고 힘든 살림과 양 육을 거의 도맡으면서 저를 뒷바라지 해주는 평생의 동반자인 사랑하는 저의 아내 고영희에게 깊은 감사의 마음을 전합니다. 2010. 12. 박성근

국문요약

한국의 서비스업에서 기술혁신이 고용에 미치는 영향
한국의 서비스산업을 대상으로 기술혁신이 고용에 미치는 영향을 알 아보기 위하여 과학기술정책연구원(STEPI)의 서비스업기술혁신조사 (2006)자료를 가지고 Bogliciano 와 Pianta (2010)의 연구모형에 기반하여 기술우위혁신전략과 비용우위혁신전략이 고용에 미치는 영향이 서비스업 의 섹터별로 어떻게 다르게 나타나는지를 기업수준에서 분석하였다. 실증 분석결과를 살펴보면, 모든 섹터의 기업에서 수요증가가 고용증가 에 가장 큰 영향을 주는 것으로 나타났고 일부섹터 기업에서는 기술혁신 전략이 고용증가에 영향을 주는 것으로 나타났다. 즉 과학기반형 기업에 서는 기술우위혁신전략이 고용에 긍정적인 영향을 주었으며, 전문공급자 형 기업에서는 비용우위혁신전략이 고용에 부정적인 영향을 주었다. 규모 및 정보집약형 기업에서는 임금증가율이 고용에 부정적인 영향을 주었으 며, 공급자지배형 기업에서는 수요증가만이 고용증가에 강한 긍정의 영향 을 주었는데 이들 두 섹터의 기업들에서는 비용우위 혹은 기술우위의 혁 신전략이 모두 고용에 유의미한 영향을 주지 못하였다. 한국의 서비스업을 대상으로 한 기업수준의 분석에서도 이처럼 산업유 형의 특성에 따라 서비스기업들은 기술혁신의 고용효과가 달랐는데 비교 적 혁신수준이 높은 과학기반형 기업들과 전문공급자형 기업들은 유럽 주 요국과 동일한 양상으로 혁신의 고용효과를 보였으나 나머지 유형의 기업 들은 혁신수준이 현저하게 떨어지므로 혁신전략자체가 고용에 유의미한
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영향을 주지 못한 것으로 보인다. 이상의 실증결과를 통해서 과학기반서비스 기업들의 경우는 기술우위혁 신전략을 강화하는 것이 고용증가에 긍정적 영향을 준다는 함의를 발견할 수 있다.
주제어 : 기술혁신, 혁신전략, 고용, 서비스혁신

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Tables of Contents
Summary ··············································································································· I Contents ··············································································································· III List of Tables ···································································································· V List of Figures ·································································································· VI

I. Introduction ···················································································· 1 II. Literature review ··········································································· 6

A. Innovation and employment, the classical debate ································· 1 B. Employment effect of innovation in service sector ···························· 2 A. Theoretical background ············································································· 6 1. Two approaches of labour market and product market ··················· 6 2. Direct and Indirect Effects of Innovation ············································ 7 3. Employment and Innovation in Service Sectors ······························ 13 4. Firm strategies ······················································································· 17 5. The restrictions and the advantages of firm level studies ············ 20 6. Service taxonomy ··················································································· 21 B. Empirical studies ······················································································· 31 A. Model ·········································································································· 37 B. Variables and propositions ······································································ 39 1. Dependent variable ················································································· 39 2. Control variables ···················································································· 40
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III. Model and the proposition ························································ 37

IV. Data and the analysis ······························································· 44

3

. Two innovation strategies ···································································· 41

V C

. onclusions and implications ···················································· 58

A. Data and descriptive statistics ······························································· 44 B. Analysis ······································································································ 46 C. Results ········································································································ 49 1. Science Based Sector ············································································ 49 2. Specialized Supplier ··············································································· 51 3. Scale and Information Intensive ·························································· 52 4. Supplier dominated ················································································· 53 5. Comparative analysis with Bogliciano and Pianta(2010) ················ 54

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List of Tables
Table 1-1> Worldwide mobile phone sales of Samsung and Apple ·················· 4 <Table 2-1> Various perspectives of service innovation taxonomy ··················· 22 <Table 2-2> Service taxonomy - Evangelista and Savona (2003) ····················· 25 <Table 2-3> Taxonomy of service sectors and it's representative sub-sectors 28 <Table 2-4> 5 major group of Korean service sectors ······································ 29 <Table 2-5> OECD ICT sector definition ···························································· 30 <Table 2-6> Empirical studies about effects of innovation on the quantity of employment ··············································································································· 34 <Table 3-1> Classification of Korean service industries ···································· 39 <Table 3-2 > Variables and their proxies ····························································· 43 <Table 4-1> Descriptive statistics ········································································ 45 <Table 4-2> Correlation between variables -SB sector ······································· 47 <Table 4-3> Correlation between variables -SS sector ········································ 47 <Table 4-4> Correlation between variables -SII sector ········································ 48 <Table 4-5> Correlation between variables -SD sector ······································· 48 <Table 4-6> Determinants of employment growth- SB sector ···························· 50 <Table 4-7> Determinants of employment growth- SS sector ···························· 52 <Table 4-8> Determinants of employment growth- SI sector ····························· 53 <Table 4-9> Determinants of employment growth- SD sector ··························· 54 <Table 4-10> Analysis summary and comparison with Bogliciano and Pianta(2010) ·············································································································· 57
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List of Figures
g re 1-1] Employment growth rate of manufacturing and service in Korea (1990 ~ 2008) ············································································································ 3 [Figure 1-2] Samsung vs Apple in mobile phone business (2009) ······················· 4 [Figure 2-1] Employment effects of product and process innovation ··················· 9 [Figure 2-2] Evolution of employment shares of manufacturing and service in Korea (1980 ~ 2008) ································································································· 15 [Figure 2-3] The comparison of labour productivity between Korean manufacturer and service sectors ··································································································· 15 [Figure 2-4] Comparison of labour productivity in service between Korean and other OECD countries ······························································································ 16 [Figure 2-5] Key links between innovation, demand and employment ················· 18 [Figure 2-6] Pavitt, Miozzo and Soete's taxonomies of innovation ···················· 23 [Figure 2-7] Dialogic's Four Dimensional Model of innovation in service ········· 27 [Figure 3-1] The model ··························································································· 38
[Fi u

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I. Introduction
A. Innovation and employment, the classical debate
owadays, the radical changes of technological paradigm based upon ICT(Information and Communication Technology) have strongly affected to the firms and industries worldwide in many sectors; and recalled the classical debate about the impact of innovation on employment as well (Freeman and Soete 1997, Vivarelli 2007) Earlier new technology system such as steam power or electricity made revolutionary radical changes and caused a fear about the technological unemployment. Since the industrial revolution has emerged, the extensive substitution of labour by machinery made economists and policy makers had interests on the technological change and social consequences (including employment effects) (Pianta, 2005) When the industrial revolution was spreading in England, there was fast growing of "Luddist movement" which destroys every new machines because they believed that the new machines and new technologies would destroy jobs or make lower wages.(Verspagen 2004) In the 1820s, 'Recardian socialists' were arguing that increased productivity by machines would steal jobs from workers and lower wages down. Technological change ,however, did not make only for
N
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labour saving but also for capital saving so it increased wages while not increase unemployment rate so much in U.K over one hundred years. (Freeman and Soete 1997, Lee 2008) Since the beginning of this debate, there were two views of employment effect of innovation: (1) negative view, or "working class opinion1)"(Ricardo, 1951) focused on the displacement effect of innovation and (2) positive view focused on the market "compensation" power and has largely dominated by academic and political debate. Additionally, the main major of positive view is technological improvement benefits both capitalists and workers by high productivity, wages and low unemployment. (Vivarelli 2007, Verspagen 2004) Structural unemployment is driven by the technological change or industrial restructuring process(Lee 2008). Although it is not easy to distinguish precisely structural unemployment from regular one, there has been fairly serious and universal problem of 'long-term' unemployment since 1990s in most developed countries(Freeman and Soete 1997, 396p). Of course, unemployment can be affected by various and complex relations of other factors and innovation is the one of these. However, innovation is an important driver for (un)employment dynamics due to two impacts on employment: the direct impact destroys or creates job opportunities and the indirect impact of compensation may be stronger.

B. Employment effect of innovation in service sector
1) For example, there were even english workers who destroyed machines for the threat of technological unemployment when the first industrial revolution emerged.
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The service sector is nowadays a major part, accounting for 50% ~ 75% of total employment and value added in most OECD countries (OECD, 2000a). Even in Korea, service sector accounted for 37.2% of total employment in 1990 and increased to 58.1% in 2004 (Shim 2005). It also generally acknowledged that service provides key role to future employment growth and many developed countries (including Korea) are moving towards a service-based economy (Petitt and Soete 2001). Since 1990 employment growth rate of service sector has shown sustained superiority than that of manufacturing and increasing its share of total employment in Korea (Kim et. al 2009).

▲--- : Manufacturing ---●--- : Service Source : Kim et. al (2009), KOSIS (Korean statistical information service) DB.
---

[Figure 1-2] Employment growth rate of manufacturing and service in Korea (1990 ~ 2008)
F

or instance, technological changes based on ICT have made a great impact on mobile service and relevant manufacturing sectors . The typical example can be identified easily when it is compared
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Samsung electronics with Apple company in mobile phone business outcome in 2009. (Table 6, Figure2)
<Table 1-6> Worldwide mobile phone sales of Samsung and Apple

Company Samsung Apple

Sales Revenue 227,000,000 36,897,458,370 25,000,000 15,687,992,989

Profit 3,593,339,176 4,382,120,947

Profit rate
10% 28%

Source : JKnews paper(2010, 02)2)

(2009, USD)

Profit rate

Profit Samsung Ravenue Apple

Sales

0%

20%

40%

60%

80%

100%

[Figure 1-3] Samsung vs Apple in mobile phone business (2009)

Apple did not only manufacture hardware device but also integrated it with knowledge intensive service echo-system, named "App store
2) JaeKyung il bo, 2010. 02. 04, http://news.jkn.co.kr/article/news/20100204/5745760.htm
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and it was the main point which have made such a remarkable results above (Figure 1-2). The service sector is not anymore only a passive user of technological innovation but the innovation in service also might be very powerful and influential to the manufacturing sector and entire economic systems. Therefore, it is important to know the employment effect of innovation in service sector. Piant(2005) noted that the future challenge of innovation studies is to extend empirical research to cover the service sector. As the power system technology was a general purpose technology(G.P.T) and did a central role for the first industrial revolution in manufacturing, so is the ICT in service. ICT can manage a lot of information at dramatically low cost and makes the world more interactive and stimulating global networking either. Furthermore, ICT reduces restrictions of time and space, spurring innovations in service(Freeman and Soete 1997). In this paper, I will summarize various views and issues about the employment effect of innovation especially in service and build my own analytical model. I will test it empirically with KIS(Korea Innovation Survey) data and find out the relationship and its sectoral differences between innovation and employment on Korean service sector as well.
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II. Literature review
The impact of innovation on employment is not clear and hard to generalize because of the various characteristics of each industries and complex interactions between direct and indirect effect. So it is ,inherently, required empirical studies (Moon and Chun 2008). Until now, majority of previous studies of this topic have done on manufacturing sectors but recently, there are growing interests of employment effect of innovation on service sectors. In this chapter I will review previous literatures to identify important theoretical issues and considerations. I also cover up classical debates on compensation mechanisms, the issue of levels of analysis (firm level or industry level analysis), service taxonomy and the main findings of prior empirical researches.

A. Theoretical background
1. Two approaches of labour market and product market Pianta(2005) argued that there were two general perspectives in employment effect of innovation: (1) labour market is the same as product market and (2) labour market is different from product market. Labour economists assumed that labour market is the same as product market and tried to explain the changes of employment with reference of job demography, macro-economic factors, wage costs, bargaining modes and flexibility of labour markets. Also, there have
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een many economists who considered technological change as exogenous variable and in doubt about the existence of "technological unemployment". They believed that the unemployment due to new technology could be, in the long run, naturally balanced by market compensation mechanisms(Jeon 2010). However, Neo-Shumpeterians have focused on the endogenous technological change and accumulative characteristics. In observation, labour market is different from product market and ,for instance, a new techno-economic paradigm which is based on ICT, create and destroy a large amount of jobs. Moreover, lost jobs and newly created jobs do usually mismatch in terms of area or required skills. These mismatches lead the technological unemployment is different from normal unemployment that can be easily absorbed by labour market mechanism(Pianta 2005; Jeon 2010). The second perspective is more powerful and suitable for explaining long term techno-economic evolution and unemployment. In neo-shumpeterian vision, Bogliacino and Pianta(2010) criticized that many economic studies tend to explain job destruction and creation with mainly labour market mechanism and assume there is no difference between labour market and product market.
b

2. Direct and Indirect Effects of Innovation a. Product Innovation, Process Innovation and Organizational Innovation The distinction between product innovation and process innovation is very important (Lachenmaier and Rottmann 2006).
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Many studies (Vivarelli et al. 1996; Evangelista 2003; Verspagen 2004) show that product innovation has a positive impact on employment because improved products or entirely new products usually lead demand increase or create new demand curve. It is called "Demand enlargement effect" (Harrison et., al 2005). On the contrary, process innovation is generally considered to have a negative direct impact on employment. Since it has aimed at increasing labour productivity, it is required less workers to get the same amount of output, named "displacement effect" (Vivarelli et al. 1996; Harrison et., al 2005). However, if this advantage of cost reduction which was caused by process innovation make the prices down; it would increase demand of the product and might give positive impact consequences on employment. It is called "compensation effect" and depends on the market structure and price elasticity (Lachenmaire and Rottmann 2006). This effect can be implemented by two ways, as Vivarelli et al. (1996) pointed out, the rent associated with process innovation passed on a decrease of prices and/or an increase of incomes on employment. In case of process innovation, it is not so clear to understand what impact (positive or negative) the process innovation have on employment because of this complex compensation effect.

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Source : Park(2006), modified

[Figure 2-1] Employment effects of product and process innovation

About non-technological innovation, Pianta(2005) considered that organizational innovation does effect on the quality of employment ) quoting studies (Greenan 2003; Piva and Vivarelli 2002) showed that organizational innovation is more important source than technological innovation for changing occupational structure and skill requirements. Even if there are not much evidences, he stressed both of
3

3

) It is so-called skill-based effect of technological change, which requires high skilled labour corresponding to new technology and dismiss low or miss-matching skilled labor. In this paper it mainly focuses on the quantity of employment.
- 9 -

organizational innovation and technological innovation are in a complementary relationship and critical for shaping productivity and employment output. b. Compensation mechanisms and other indirect effects The theoretical debate about the employment impacts of technological change has a long history and still open; and the key point is compensation mechanims (Evangelista and Savona, 2003). Vivarelli(2007) summarized and criticized classical debates of compensation mechanisms. Here there are the compensation mechanisms and its main restrictions which have to be considered follow as:
(1) decrease in price

It is the basic one. Process innovation leads cost reduction and this effect decreasing prices ; in turn, decreasing prices stimulate a new demand for product and new employment. VS First impact of process innovation might be decreasing in employment and this compensation mechanism must overcome this initial decreasing employment and its buying power. Also, this does not take into account demand constraints which might influence demand elasticity.
(2) new machine

If upstream user sectors or technology users do process innovation, then the demand of new machines from them might lead the increase production and employment for their supplier industries.
- 10 -

If buying new machines is not additional investments, but only substitutional investments, then it will have no compensation effect. (Freeman et. al., 1982)
(3) new investments

V

S

Decreasing in cost of unit production, due to process innovation, or any other technological progress, does not instantly link to price down and extra benefit during this gap, would lead to new investment and also consequent new employment. Since Ricardo (1951) has proposed this assumption, many neo-classicals like as Marshall(1961) reassumed it. vs Accumulated profits by process innovation will not entirely and immediately translated into additional investments. In case of that, the industries are capital-intensive, compensation effect will be partial.
(4) decrease in wages

In neoclassical model, when it is assumed the free competition and full substitutability between labour and capital, the unemployment due to labour saving technological change might be compensated by the labour market mechanism. As technological unemployment might imply decrease in wages and again, labour intensive business model can be attractive; and eventually it might increase employment, at least in terms of quantity, can be compensated by labour market mechanism. vs In keynesian world, decrease in wages means decrease in buying
- 11 -

ower. It can be translated into decreased business expectation and leads to reducing employment. Additionally, if it is considered that technological change is cumulative and its path-dependent nature or technological trajectory, full substitutability between labour and capital is not realistic consequently. It can hardly be compensated by market mechanism.
p
(5) increase in incomes

It is in contrast with the decrease in prices mechanism. In keynesian tradition, cost saving due to innovation translated into higher income and hence higher demand and of course, job creation effects consequence. vs Appelbaum and Schettkat (1995) analyzed the disappearance of the positive relationship between productivity and employment growth rates in industrialized economies since the 1970s. In 1950s and 1960s, workers were allowed to take a relevant portion of profit due to technological progress and made "virtuous circle". But now, this pattern does not exist any more since distribution of income has followed different rules.
(6) new products

Sometimes technological change can make entirely new market branches, new industries, hence, new additional jobs can be emerged. Currently many studies (Freeman et al. 1982; Vivarelli and Pianta 2000) agree the "labour-friendly nature" of product innovation. vs
- 12 -

Although this is the least problematic one, the different "technological paradigms" have their own different impact mechanism on employment. The "welfare effect" or new branches of production must be compared with "substitution effect" for aggregate effect. For instance, introduction of new kind of automobile might have more labour intensive effects than the introduction of new kind of home computers. As above discussion, classical taxonomy of this compensation mechanism of the current mainstream economic theory that is disputable, can not fully explain today's employment impact of radical change of technology based on ICT. Therefore, it is important to study empirically how this compensation mechanisms work. 3. Employment and Innovation in Service Sectors In service sectors, there are somewhat different consideration from the mechanisms discussed above. Evangelista and Savona (2003) expected that the presence of positive link between technological progress and employment in service are based upon the following ideas although they need to be empirically evidenced for the future. First, the employment/output growth elasticity in services is greater than that of manufacturing sector and intrinsically labour intensive nature of service sector also might tend to adopt new technology which is not labour saving. Second, main streams are moving from traditional service sectors with low productivity toward knowledge based economy and highly productive service sectors such as KIBS (Knowledg Intensive Business Service). KIBS sectors based on ICT can mostly benefit from
- 13 -

compensation mechanism via new machines since downstream sector, such as manufacturing firms adopt new ICT based services for their process innovation. Third, when the new technological paradigm emerges, more opportunities will be given to service sector to make entirely new (knowledge based) service industries increasing employment in this sectors (since it is moving toward knowledge based economy). The last is the most convincing one. According to Engel's Law, low prices and high income due to technological progress can increase consumption in mainly service sectors, hence it gives a positive employment impact especially on the service sector. a. Employment in Korean service sectors In terms of quantity, employment in service is getting better than that of manufacturing sector (Figure 2-2) and the growth rate is not bad compared with other OECD countries. But it is not good in terms of labour productivity compared with the manufacturing sectors (Figure 2-2) and other developed countries (Kim et. al., 2009).

- 14 -

[Figure 2-2] Evolution of employment shares of manufacturing and service in Korea (1980 ~ 2008)
---

▲---

:

Manufacturing

---

●---

:

Service

Source : Kim et. al (2009), KOSIS (Korean statistical information service) DB.

Source : e-KIET industrial economic information vol. 386
- 15 -

[Figure 2-3] The comparison of labour productivity between Korean manufacturer and service sectors

Source : e-KIET industrial economic information vol. 386

[Figure 2-4] Comparison of labour productivity in service between Korean and other OECD countries

b. Innovation in Korean Service sectors Korean service sectors, except some ICT related service, greatly fall behind European countries while Korean manufacturing sectors are in high level in terms of innovativeness (Umm et. al., 2006). In addition, the share of employment in Korean service sectors has been increased relatively fast but in case of vale-added, it is much slower when it is compared with that of European countries. It means the unbalance in innovativeness between manufacturing and service sectors in Korea is bigger than that of European countries(Kim, 2009). In summary, the share of employment of Korean service sectors is much higher and growing faster than manufacturing sectors and European countries. On the contrary, the innovativeness of these
- 16 -

sectors fall behind manufacturing sectors and the productivity gap between service and manufacturing is much greater than that of European countries. There are two main mechanisms of employment growth in service (Evangelista and Savona, 2003; Baumol 1967). The one driver of employment growth in service can be explained by the enlargement of the industry and market. It assumes that innovations in service increases value and enlarge market itself and actively increase employment. Alternatively, it can be explained by the "productivity gap" between service and manufacturing. It considers that innovations in manufacturing increases productivity and make a productivity gap with service and, the employment growth in service reflects the employment movement from the relatively high efficient manufacturing sector to the relatively low efficient service sector. It is possible to expect that the second driver affected the increase in employment share of Korean service sectors; and firms in service sectors tend to be low in terms of innovativeness and, totally, technological innovation hardly affect the employment of service firms, especially that of firms in low tech service sectors. 4. Firm strategies Soete(1996) emphasized the importance of the prevailing type of competition on markets as below: " Thus even when the internationalization of manufacturing and service industries is expanding, spurred by low costs of transportation and communication, the balance of the interactions between technology and employment much
- 17 -

depends on the type of competition prevailing on product markets and on service markets, which concentrate two thirds of employment." And Pianta(2001) also argued that it is important to know the linkage between the innovation process, the economic structure, the forms of competition and demand in order to investigate the effects on employment and showed the key links between innovation, demand and employment.

Source : Pianta (2001)

[Figure 2-5] Key links between innovation, demand and employment

According to Evangelista and Savona(2003), the direct impact of innovation on employment varies greatly regard to the type of
- 18 -

nnovation strategy of firms. Firms focused their innovation strategy on introducing new service and have high level of internal R&D intensity tended to be more positive in terms of innovation's employment impact. Pianta(2001) and Bogliciano & Pianta(2010) identified a distinction between a strategy of technological competitiveness and of cost competitiveness. They used these type of innovation strategy as a main explanation variables to the growth of employment. Actually these are connected with the nature of product innovation and process innovation. The aim of product innovation is improvement of quality or diversify products and get more output and it can be linked to technological competitiveness strategy. However, process innovation is usually focusing on reducing cost or increase operation efficiency so getting less input and can be linked to cost competitiveness strategy. As Bogliciano and Pianta(2010) has pointed out, the innovation variables are difficult to be expressed in rates from innovation survey and even it is much less reasonable to measure innovation level by counting innovation activities. More objective information can be obtained from data about innovation expenditure (innovation input) and the share of turnover from new products (innovation output). It is also difficult to measure by quantitative scale and differentiate process innovation from product innovation especially in service firms. Therefore, it is clear in using strategies of innovation (technological competitiveness or cost competitiveness) which is more effective way in order to investigate the employment effect of innovation in service
i
- 19 -

rms instead of using type of innovation (product innovation and process innovation). KIS(Korea Innovation Survey) has included questions that are asking the purpose of innovation if it was for reducing cost or improving product quality and the share of new products or improved products.
fi

5. The restrictions and the advantages of firm level studies Studies at the firm level have serious dilemmas for showing overall effect on aggregate industry. One is that it can not consider business stealing effect. Even though a firm's employment increased by innovation that might steal other competitors market share and affect their employment decreasing and consequently overall employment of the industry might have been decreased by innovation. Also a firm exits or entries outside the panel can be an important source of employment dynamics. The other problem is sample selection bias. A study at the firm level is difficult to be generalized because it can not be convinced that the firm is representative of the industry (Mastrostefano and Pianta 2005; Pianta 2005). On the other hand, Harrison et al.(2005) argued that study at the firm level is important because the firm level effect of innovation on employment can influence employees (or other stake holders) to determine innovation type and effects on prices. It may cause them resist or encourage innovation and this micro-level mechanism is essential for designing labour market regulations or innovation policy. Verspagen (2004) agreed these restrictions of firm level studies but
- 20 -

also pointed out the importance of studying the link between innovation and employment at the firm level since measuring innovation has directly conducted at the firm level. Also, Piva and Vivarelli (2005) agrees that the firm level studies have a disadvantage of inability of generalization so it can only take into account partial compensation mechanisms, however, they are still meaningful since micro-economic data can capture full direct labour saving effect of innovation. 6. Service taxonomy The employment impacts of technological progress is not uniform across sectors or industries (Evengelista 2003; Bogliacino and Pianta 2010). It is, therefore, important to take into account service taxonomy to capture exact employment impact patterns of innovation in service sectors. Originally Pavitt (1984) made taxonomy which reflects each unique innovation patterns and concerned in manufacturing sectors more than service sectors but there were debates of the difference between manufacturing and service sectors. Hong and Jang(2009) summarized perspectives of the relevant studies and supported the recent perspective of "synthesis"
<Table 2-1> Various perspectives of service innovation taxonomy

Innovation in service and manufacturing Common

C
C

haracteristics and Related Articles

lassification based on the technology development
- 21 -

characteristics Different characteristics Synthesis approach
Source: Hong and Jang (2009)

characteristic : Pavitt(1984), Miozzo and Soete(2001), Evangelista(2000) lassification based on cycle of innovation development :Barras(1986)
C

lassification based on serfvice organization and form : Sunbo and Gallouj(2000)
C

Dialogic Model : van Ark, Broersma and den Hertog(2003)

Tether and Howells (2007) also identified four paradigms since 1980s, "neglect", "assimilation", "distinction", and "synthesis" perspectives in the similar way as follows: a. Relationship with manufacturing sector
(1) Neglect

rst one, 'neglect' is just neglecting the innovation in services. Until 1980s service sectors were considered as not innovator but only users and even until these days, many innovation studies have focused on the generation of new technologies rather than their use or diffusion. However, most economic progress in society comes from 'technology-in-use' and not the creation of new technology itself (Edgerton 1999).
Fi
(2) Assimilation

- 22 -

In the original Pavitt's taxonomy (1984), service sector had not been specifically identified and just included in supplier dominated sectors ). Miozzo and Soete(2001) extracted service sectors from supplier dominated sector and made a unique taxonomy ,however, basically it is not different from Pavitt's taxonomy framework since most of service sectors were recognized as technology users.
4

Source : Tether and Howells(2007)

[Figure 2-6] Pavitt, Miozzo and Soete's taxonomies of innovation

Although, Evangelista(2000)'s taxonomy of service is emphasizing the unique characteristics of service innovation, but considered "broadly" supports Pavitt's conceptualizations of innovation in manufacturing (Hong and Jang 2009 ; Tether and Howells 2007). However, Evangelista and Savona (2003) recalled Evangelista(2000)'s
4 L

) ater, Pavitt extended his taxonomy to services, called Information Intensive industries in which included mainly ICT user service sectors (Tidd et al., 2005)
- 23 -

taxonomy ) and identified three sectoral patterns that reflects relationship between innovation and employment in service, which was (1) "technology users(KSIC 60, 61, 62, 63)", (2) "ICT users (KSIC 65, 66, 67, 51) " and (3) "Science & Technology-based" sectors ) (KSIC 72, 73, 74). In their view, it seemed that ICT is the main affecting technology in service since they have newly added "ICT users" classification. This study seems to have moved toward the "distinct" perspective since they have given attention to diffusion of new technologies and production either. They also grouped these service sectors according to mainly innovation expenditure for generating basically and for diffusing technological knowledge mainly. That's why it was reflecting the unique characteristics of service sector.
5 6

5 Oi i vi 6 p

) r g nally, it was "Technology Users", "Interactive Services", "Science and Technology Based Ser ces", and "Technology Consultancy Services" ) They argued that telecommunications are located at the crossroad of the three main atterns(Evangelista and Savona 2003, 460p)
- 24 -

<Table 2-2> Service taxonomy - Evangelista and Savona (2003)

Classification of service sectors
Technology users ICT users

Innovation expenditure
L

Main expenditure
Technology embodied machinery and equipments (Passive user) Developing and acquisition of software (Active user)
R&

ow

Medium (if any) High

Science & Technology -based
*

D and Design activity (New technology generator)

Evangelista and Savona(2003) modified.
O

n the other hand, recently, Bogliciano and Pianta (2010) revised Pavitt (1984) classic taxonomy which characterizes sectoral patterns of technological change and extended it to include service sectors reflecting specific relationships between innovation and economic variables which are shaping employment output.
(3) Distinction

arras (1986) studied financial services and observed that in financial sectors innovation is firstly focusing on back-office efficiency through ICT and then, launch a new service product and he proposed RPC (Reverse Product Life Cycle) model and argued that process innovation precedes product innovation in service sector. Sundbo and Gallouj(2001) differently outlined a number of service innovation patterns, mainly focusing on organizational issues and
B
- 25 -

nteractivity rather than technologies as the key element of innovation in service. Researchers following this approach argues that it is necessary to move away from focusing too much on narrow technological view on innovation compared with manufacturing sector for attention to non-technological delivery innovation, interactions and the use of new technologies as well as the generation of innovation (Tether and Howells 2007).
i
(4) Synthesis

Tether and Howells (2007) noted that researchers studying innovation in services have increased recognition of the importance of both technological and organizational innovation and interactions between them; and recognition of the shift away from 'manufacturing' versus 'service' framework towards organizations that are focusing on realization of value. They argued the innovation research shift as following:
"

This has moved the focus of research away from technologies to knowledge, and away from individual firms towards understanding value chai ns or networks, locating ser vice and manufactur ing in a set of interrelated activities (Womack et al. 1990; Davies 2003" .
The representative model of this perspective is Dialogic consultancy model which highlights four dimensions of innovation. In this model, only one of them is technological one, but it is in the central position and recognizes the major role for the service innovation during 1980s and 1990s (Hong and Jang 2009; Tether and Howells 2007).
- 26 -

Source : Den Hertog (2000)

[Figure 2-7] Dialogic's Four Dimensional Model of innovation in service

b. Other classifications by general concept, knowledge and ICT Park and Jung (2004) classified all sectors via knowledge intensity level. They measured the level by the traditional R&D intensity (R&D expenditure and employee's education status and the share of researcher etc.). However in their classification, high level knowledge service sector include only business service sector and telecommunication service, financial and insurance service sectors and almost every other service sectors were classified as middle level knowledge service. Since each country has its own characteristics and classification code, researchers have tended to use standard taxonomy for purposes
- 27 -

of economic analysis and the dominant one has been Hill's (1977) classification which was examined in the light of the general concept of a service. However, it is too old and does not reflect current status of each sub-sectors. For instance, communication sector and retail trade, transport services are included in the same "Distributive services" group.
<Table 2-3> Taxonomy of service sectors and it's representative sub-sectors

Producer

Distributive

Personal

Social

s ness and ro essional services Retail & Wholesale Financial and Transport Insurance Communications Real estate
Bu i p f

Hotel, restaurants Government proper (civil or military) Recreation, amusements Health Other personal Educational services

Source : OECD(2000)

m et. al (2009) revised above taxonomy reflecting current Korean service industries and its employment characteristics. This grouping included 76.6% of total service sectors employment.
Ki

- 28 -

<Table 2-4> 5 major group of Korean service sectors Share of Grouping employment Subsectors (%)
etail, Hotel and estaurant Financial & Insurance Telecommunication Business service
R R 35 8

Social service Total (%) Source : Kim et. al (2009)

and Wholesales . Retail and Restaurant Hotel 5.2 Financial and Insurance 1.7 Telecommunication 12.1 Business service Civil service ser 21.8 Educational ce vice Health servi (Same as Hill(1977)'s taxonomy) 76.6

ke as Evangelista and Savona(2003), Moon et. al (2006) also put their main interests on ICT. They simply divided service sectors by wether or not it is ICT firms. They defined communication (KSCI code, 64), and Information process & Computer operation service (KSCI code, 72) as ICT industry in service. Recently OECD (2009) revised ICT definition from ISIC Rev. 3.1 to ISIC Rev. 4 and the main change was the add-on of "ICT trade industries". Original ICT definition (OECD 2002) was comprised of ICT manufacturing and ICT service. According to this classification, wholesale of computers and electronic and telecommunications equipment and parts are included in ICT sectors. This inclusion of relevant wholesale industries in the
Li
- 29 -

definition had broad support because, for example, ICT firms, such as IBM, are manufacturer in some OECD countries and they are often distributors of ICTs in other countries (OECD 2009).
<Table 2-5> OECD ICT sector definition

Source : OECD(2009)

m et. al (2007) defined ICT sectors as IT manufacturing and IT service and the latter included Information & Telecommunication service (wire, wireless communication service and broadcasting service) and computer & Software related services.
Ki
- 30 -

c. Revised Pavitt(1984) taxonomy Recently, Bogliciano and Pianta(2010) have revised the original Pavitt (1984) taxonomy and they included service industries. They showed that the taxonomy reflects not only specific patterns of technological change but also the diverse employment impact mechanisms of innovation. Although there are concerns about the possibility that the taxonomy does not fit Korean service sector; there is a study that shows the original Pavitt (1984) taxonomy can be used for Korean manufacturing sectors (Hong and kim, 2005).

B. Empirical studies
Since it has become available to get large data set through innovation survey, many economists have analyzed the relationship between employment and innovation with elaborate econometrics production function models. Using the multi-product framework proposed by Jaumandreu (2003), Peters (2004) studied the difference in employment impact between new to the firm product innovation and new to the market product innovation and found no significant difference between two of them. He used data set of 2,200 German manufacturing and service firms from third Community Innovation Surveys (CIS3) and pointed out that there are various kinds of process innovations, and only some of them might be focusing on rationalization innovation for production efficiency and significantly negative impact on employment. So the process innovation is not responsible for a significant reduction of
- 31 -

employment demand in service firms in 1998-2000 in Germany. Harrison et al. (2005) built their econometrics model and investigated the impact of process innovation and product innovation introduced by firms on their employment growth. They used firm-level data from France, Germany, Spain and UK both manufacturing and service sectors and argued positive employment impact of product innovation and not negative impact of process innovation all across the countries. Using Gali(1999)'s VAR model, Kang(2005) empirically found that technological innovation gave positive impact in terms of employment and financial performance in manufacturing sector but it did not give significant impact in service sector. Although service sectors vary greatly in many ways, he did not take into account sectoral difference and found no implication in service sector. Moon and Chun (2008) also used Harrison (2005)'s model and investigated if there is a difference in the employment effect of innovation between ICT and non-ICT manufacturing firms. They used KIS 2002 (Korea Innovation Survey) data and found that product innovation gave a positive impact and process innovation had no significantly negative impact on employment; and it didn't have any differences between ICT and non-ICT firms. On the other hand, some of neo-schumpeterian innovation researchers have focused more on the technological change and sectoral difference in impacts rather than normal labour market mechanisms. Vivarelli, Evangelista and Pianta (1996) used firm-level data from CNR-ISTAT innovation survey and estimated regression with
- 32 -

ar a les from the data set and they showed the overall negative employment impact of innovation in Italian manufacturing. They also explained the negative employment impact by the dominant role of process innovations and technological changes in firm's innovative activities. However, their finding was positive effect for some sectors whose share of product innovation was high and characterized by high R&D intensity. Evangelista and Savona (2003) studied the employment impact of innovation in Italian service sectors. They used CIS data (1993-1995) and found overall negative impact in Italian service sector. They also discovered that firm size, strategy and sectoral characteristics influenced the effect and produced various employment output. Large firms tended to be negative and firm strategies which are focusing on new service, internal R&D activities were positive in terms of employment growth rate. Only science-based sector was positive, in while, the other sectors, such as technology user and ICT user group had been negative employment effect of innovation. This can be interpreted that the science-based sector, since it has been in the upstream position of the other two sectors. So this sector receives much impacts by compensation mechanism via new machine. For instance, if technology user or ICT user groups might have succeeded in process innovation then, at the same time, it might have lead the upstream suppliers to increase their production and consequent employment. Pianta (2005) summarized empirical studies by the aggregate level of analysis, such as firm level, industry level, macroeconomic level and
v i b
- 33 -

simulation studies.
<Table 2-6> Empirical studies about effects of innovation on the quantity of employment
Machin and 1984 adhwani 1991 UK Brouwer et al. Netherlands 1983-88 1993 Meghir et al. UK 1976-82 1996 Reenen 1997 UK 1976-82 Smolny 1998 Germany 1980-92 Greenan and France 1986-90 Guellec 2000

Study Country Years Firm level studies

Data

Results

W

i

Meyer-Kramer 1992
Viv

Industry level studies
G

Positive Negative, Dutch survey Positive with Product innovation SPRU innovation Positive more database and patents flexibility Survey on UK firms Positive Survey on German firms Positive Innovation survey Positiveleatelthe firm v Industry data Innovation survey Innovation survey Innovation survey Innovation survey egative, Diff. by sector Negative of process innovation Positive of product innovation Overall negative, Positive of product innovation Overall negative, Positive of product innovation Overall negative, differentiated by service industries and
N

British workplace ndustrial relations survey

ermany Italy

1980s 1985

arelli et al. 1996

E Pianta 2000, 2001 co5untrUies 1989-93 Antonucci and 8 EU 1994-99 Pianta, 2002 countries Evangelista and Savona 2002, Italy 1993-95 2003

- 34 -

Macroeconomic level studies
L Ni

size
L b u p

ayard and ckell 1985

UK

1954-83

a o r roductivity

Viv

R& linked arelli 1995 US and Italy 1966-86 and D rocess ito pvrodiuct p nno at ons

Simonetti et al. US, Italy, 1956-93 R&D linked to product 2000 Frace, Japan and process innovations Simonetti and R&D linked to product Tancioni, 2002 UK and Italy 1970-98 and process innovations Source : Pianta (2005)

e tral Diff. by compensation mechanism and country Diff. by compensation mechanism and country Diff. by compensation mechanism and country
N u

The comparison of table (2-6) shows that firm level studies usually argue positive impacts of innovation (Mastrostefano and Pianta, 2009) while industry level studies argue the overall negative impacts that have some exceptions with product innovation and differentiation by sector or firm size. And macroeconomic level studies, using 20 years ~ 30 years panel data, show that there is no general rule and various differentiations by compensation mechanisms. Bogliciano and Pianta (2010) studied the linkage between employment and innovation of eight European countries at industry level and showed various patterns across each sectors. According to their research, Technological Competitiveness was one of the main driver for the increasing of employment and wage growth did not discourage job creation in Science B ased sector. For the Sp ecializ ed Supp lier, Cost Competitiveness gave negative impact on employment while Technological Competitiveness gave no
- 35 -

significant effect on it. Cost Competitiveness was dominant innovation strategy in Scale and Information Intensive sectors and also gave a strong negative impact on employment while Technological Competitiveness gave a weak positive effect on employment. Supp lier Dominated sectors also have gotten negative impact on employment by Cost Competitiveness strategy, decreasing in need and increasing in wage. Considering literature review as discussion, there are four implications that should be paid attention as follow: (1) technological competitiveness innovation strategy which focuses on product innovation has a positive employment impact, (2) the employment effect of innovation is not uniform to every industries (3) considering that many industry level studies showed overall negative impact, business stealing effect at the aggregate level might be enormous and (4) there are growing importance of compensation mechanisms at the macroeconomic level.

- 36 -

III. Model and the proposition A. Model
ecently Bogliciano and Pianta(2010) proposed the revised Pavitt(1984) taxonomy and investigated various employment effects of innovation across sectors in eight EURO countries. The model in this study is based on their work because it considers innovation strategies as the important explanatory variables for the employment dynamics and their taxonomy reflects not only various innovation patterns but also various employment effects of innovation. However, it has been modified ) a little because the data set of Bogliciano and Pianta(2010) is not the same as the data set in this study. They used special database or SID (Sectoral Innovation Database) which integrates to CIS(Community Innovation Survey) 2(1994-1996), CIS 3(1998-2000) by Oslo manual and other data sets, such as OECD STAN, for economic indicators. The rate of change of labour input of the sector(E) is regressed over a variables of innovation strategy of technological competitiveness(TC), that of cost competitiveness(CC), labour costs(W) and Demand dynamics(D) and firm size(S) dummy has been included and error (ε).
R
7

7

) Industry dynamics(the number of new firms that newly entered into the industry) variables has been excluded and instead of rate of growth of value added, it uses rate of growth of total revenue. In addition, it does not consider time lag between innovations and their results. However, it controls firms size (whether or not it is a large firms, dummy variable)
- 37 -

E = β0 + β1*TC + β2*CC + β3*S + β4*W + β5*D + ε

(1)

E ; Changes in employment / β : coefficient / TC : Technological Competitivneness / CC : Cost Competitiveness / S : Firm size / W : Wage / D : Demand / ε : error T.C
CC

.

Size
W

Employment dynamics

age
[Figure 3-1] The model

Demand Since one of the purposes of this study is to investigate diverse employment effect patterns of innovation strategy across sectors it is essential to classify service sectors and ,as mentioned earlier, classification in this study is based upon Bogliciano and Pianta(2010)'s revised Pavit(1984) taxonomy ; All ,but one industry(KSIC code 87),
- 38 -

of the KIS 2006 has been included into one of 4 groups as the following table.
<Table 3-1> Classification of Korean service industries Including industries Sectors (KSIC 2digit code)
Science-Based (SB) Telecommunications (64), Computer and related activities (72), Research and development (73)

Specialized Suppliers (SS) Pro)fessional, Scientific and Technical Services, n.e.c. (74 Financial Institutions, Except Insurance and Pension Funding(65) Scale and Information Activities Auxiliary to Insurance and Pension Funding Intensive (SI) (66) Activities Auxiliary to Financial Service and Insurance Activities(67) Wholesale Trade and Commission Trade (51) Land Transport ; Transport Via Pipelines (60) Supplier Dominated (SD) Water Transport (61) Air Transport (62) Storage and support activities for transportation (63)

B. Variables and propositions
1. Dependent variable
- 39 -

ogliciano and Pianta(2010) ,originally, used two kinds of dependent variables, which are average annual rate of growth of work hours and that of employees. Work hours might be also meaningful and more accurate variable than the mere of total number of employees. However, since KIS 2006 did not include this information only the annual growth rate of employee has been used as dependent variable.
B

2. Control variables According to Evangelista and Savona (2003), large firms were likely to have a negative impact in terms of quantity of employment growth, hence, the model controls size of firms. Vivarelli et., al (1996) also included firm size and proxied it through the number of employee per firm. However, in this study, it will use the specific firm-size-code that KIS 2006 provides and made a dummy code which is 1 in case of large firm(1) and 0 in case of medium(2) or small(3) sized firm. The next one is the change of wage. Many researchers have showed the increase in labour compensation had a overall negative impact on employment in many sectors. (Mastrostefano and Pianta 2005; Piva and Vivarelli 2005; Antonucci and Pianta 2002; Bogliciano and Pianta 2010) Since KIS 2006 does not provide any information about wage of employee, in this study, I used OES(Occupational Employment Statistics)data set that KEIS(Korea Employment Information Service) provided to get the average labour compensation of each industry each year and then integrated it into the KIS 2006 data set.#
- 40 -

hanges in total demand has been proved one of main driver for employment growth and many studies proxied it through the change in value-added or change in value-added per employee (Antonucci and Pianta 2002; Mastrostefano and Pianta 2005; Bogliciano and Pianta 2010)
C

3. Two innovation strategies Labour market is different from product market in Neo-Shumpeterian approach ; not only economic variables, such as change in the demand or wage, but also innovation strategy can do influence the employment dynamics. Pianta(2001) made distinction between the innovation strategy for the technological competitiveness and the one for the cost competitiveness and argued the former is associated with mainly product innovation while the latter is associated with mainly process innovation. Bogliciano and Pianta(2010) used above two innovation variables for their main explanatory variables for the employment dynamics and they proxied TC(Technological Competitiveness) through the share of turnover from new products and CC(Cost Competitiveness) through the share of firms innovating to reduce labour cost. In this study, TC is measured by the share of turnover from new products, which is the sum of share of new product that is new to the market, new to the firm and that has been improved incrementally. CC is measured in likert 5 scales which is asking the degree of the main purpose of innovation which was aiming for reducing labour cost. Considering all the above studies, it is expected that the employment
- 41 -

effect of innovation strategy is not uniform across sectors and according to Bogliciano and Pianta(2010) and Evangelista and Savona(2003) it is possible to make 4 propositions for each sectors. Proposition 1. Technological Competitiveness will give positive (+) impact on employment of firms in Science Based sector. Proposition 2. Cost Competitiveness will give negative (-) impact on employment of firms in Specialized Supplier sector In Scale and Information Intensive sectors, Proposition 3.1. Cost Competitiveness will give negative (-) impact on employment 3.2. Technological Competitiveness will give positive (+) impact on employment. 3.3. Increase in wages will give negative (-) impact on employment. Proposition 4. Cost Competitiveness, decrease in need and increase in wages will give negative (-) impact on employment of firms in Supplier Dominated sectors

- 42 -

<Table 3-2 > Variables and their proxies Variable Proxy
Average Employment dynamics growth of emannual rate of ployee (E) (2003~2005) Innovation strategy for technological competitiveness (TC) Share of new product
Fu

description
ll time employees

Innovation strategy Share of firms innovating for cost competitiveness to reduce labour cost (CC) rm size(S) age dynamics (W) Dummy variable Large firm(1) -> 1 Medium firm (2) -> 0 Small firm (3) -> 0 The rate of growth of Average monthly pay per labour compensation employee, industry by (2003~2005) industry (KSIC 2digit) rm size code of KIS 2006 (FY 2005)
Fi

Fi

W

growth Demand dynamics (D) revTheerate of 2005) of total enu (2003~

- 43 -

IV. Data and the analysis
A. Data and descriptive statistics
ke CIS(Community Innovation Survey), KIS(Korea Innovation Survey) also follows the Oslo manual which is the international guide for innovation survey. Total samples of KIS 2006 was 2,492 but 131 out of them was Motion Picture, Broadcasting and Performing Arts Industries (KSIC 87) and could not fit into any of the four sectors. So I excluded them from analysis. Additionally, I excluded 11 cases to reduce the impact of distortion outliers by checking out Cook's and Mahalanobis's distance. and samples that did not respond to any of questionnaires ) that link to the variables has been excluded as well. Finally 445 samples has been used for analysis. <Table 4-1> implies that firms in the science based sector records much larger share of turnover from new product than any other sectors and focuses more on the technological competitiveness rather than cost competitiveness. On the contrary, the other sectors are more focusing on cost competitiveness especially, in the case of supplier dominated sector.
Li
8

8

) The number of employee each year, firm size, revenue of each year, the share of
- 44 -

<Table 4-1> Descriptive statistics
rowth of (03~05) Share of turnover from new product (05) (%) Share of firms innovating to reduce labour cost (%) Growth of labour compensation (03~05) Growth of total revenue (03~05) The number of large firm (%) Number of samples ( %)
G

Items

Mean DeviStd. ation employment .10 .23
34 7

Total

Mean DeviStd. Mean DeviStd. Mean DeviStd. Mean DeviStd. ation ation ation ation .14 .27 .10 .18 .06 .20 .08 .19
53 88 38 46

SB

SS

SII

SD

.0 .72 .20

4

0.14 .0 .21

. .

39 74 35

.

43 83 44 44

. .

4 77 34 6 N/

0.

85 96

.0 .1 .96 .20

22.87 25.11 .09 .81 (21.71 %)
33

39 8 5 6

.0 .51 .16

4 3 36 5

0. 1 .0 .12

3 64

1.

36 5

.01 .13 .42

.0
9

2. 2

.59 .22

.68 .16

A) .27
8

1 (15.96 %)
7 445

.56

(100.00 %)

13 (8.33 %) 156 (35.06%)

(11.11 %)

2 (16.18%)
7

152 (34.16%)

.31 17 (26.15 %)

(14.61%)

65

9

) Since there were only one industry in SS sector, average wage data by industry is meaningless.
- 45 -

B. Analysis
rst, I checked out if the model is appropriate for the data set. In order to analyze by OLS(Ordinary Least Squares), it is required to meet Gauss-Markov's assumption10) and there was no problem to use OLS estimator to get the BLUE(Best linear unbiased estimator) of the coefficients. Additionally, in order not to make a multicollinearity problem, correlation analysis of all the variables has been made and it shows that the rate of growth of revenue has a strong correlation with the rate of growth of employment in all sectors. The following tables show a close relationship between the employment growth rate and the share of turnover from new products in Science Based sector, and the share of firms innovating to reduce labour cost in Specialized Supplier sector. Employment can be influenced by another economic factors, such as changes in demand or wages. Hence, hierarchical multiple regression analysis will be used to control these factors in order to investigate net-effect of innovation strategy in which, I will put changes in wage and demand and the firm size into block 1 and technological competitiveness, cost competitiveness into block 2 with enter method.
Fi

10) The errors in the linear regression model must have expectation zero and are uncorrelated and have equal variances, or homoscedastic. For diagnosis of independence of the errors, Durbin-Watson value has been used, which ranges from 0 to 4 and shows uncrrelatedness between the errors in the model if the indicator is close to 2
- 46 -

<Table 4-2> Correlation between variables -SB sector
Firm size Wage growth (03~05) Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

Firm size Wage growth (03~05 Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

1
.029 -.031 .037 .229* ** -.043

 

   

     

       

       

1
-.124*** -.152***

1
-.039

1
.023

.169**

.046

1

 

-.062

.242***

.122**

-.011

1

<Table 4-3> Correlation between variables -SS sector
Firm size Wage growth (03~05) Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

Firm size Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

1 -.016 .102* * .185* * -.020

 
1 -.033

 
  1

 
   

     

     

.105

.124

1

 

 

.196***

-.025

-.049

1

1

- 47 -

<Table 4-4> Correlation between variables -SII sector
Firm size Wage growth (03~05) Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

Firm size Wage growth (03~05 Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

1 -.018 -.071 .335***

  1 -.080 .059

    1 -.062

      1

       

       

.080

-.020

.062

.014

1

 

-.044

-.059

.278***

-.109

-.344**

1

<Table 4-5> Correlation between variables -SD sector
Firm size Wage growth (03~05) Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

Firm size Wage growth (03~05 Revenue growth (03~05) Share of turnover from new product Share of firms innovating to reduce labour cost Employment growth (03~05)

1 .058 -.018 .108***

  1 -.002 -.002

    1 -.007

      1

       

       

.096

.199**

.038

.051

1

 

-.039

-.008

.135***

.006

.052

1

- 48 -

C. Results11)
1. Science Based Sector When the regression model has been estimated by OLS, R square of the model 2 into which innovation variables entered increased from 0.23 of the model 1 to 0.27 and there was significant F change. This means that even after controlling the economic variables, the innovation variables gave a significant impact on employment in this sector. It shows that revenue growth gave the strongest positive effect on employment dynamics and the innovation strategy for technological Competitiveness (share of turnover from new product) gave a significant positive impact on employment. However, the innovation strategy for cost competitiveness (Share of firms innovating to reduce labour cost) did not give significant impact on employment dynamics. Although many studies show that the increase in wage gave a negative employment effect in many sectors, it gave a weak positive impact on employment dynamics. Even in Bogliciano and Pianta(2010), SB was the only sector that the change in wage did not affect employment growth significantly. It is consistent that it implies that the labour market mechanism by the labour cost does not work dominantly in this type of sectors since some R&D investment can be translated into the growth in wage of technicians in this sector and it can be partially associated with Technological Competitiveness.
11) * Significant at 10% level, ** Significant at 5% level, * Significant at 1% level
- 49 -

n the other hand, there was no significant difference between SMB and large firms in terms of employment growth, which was different from Evangelista and Savona(2003). As a result, since technological competitiveness gave a significant positive impact on employment growth, proposition 1 has been proven by this result.
O

<Table 4-6> Determinants of employment growth- SB sector
Independent Variable constant Firm size Wage growth(‘03~‘05) Revenue growth(‘03~’05) Share of turnover from new product Share of firms innovating to reduce labour cost. R 2 (adj. R 2) F F change Durbin-Watson

.107 .071 .172 .051

Model 1 SE Std. β t-value
  -

.021 .129

. 0 .109   -.291 .072 -.001 1.644 .171 .133
-9 7

SE

β

Model 2 t-value

1.   -.011 1.080 1.695* 1.249
- 593

VIF

.516 6.616*** .050 .499 6.477*** 1.214 .000 .191 .001 .006 .230 (.214) 15.092*** 2.700** 1.027 .086 1.083 .265 (.241) 10.842*** 3.671** 1.711

- 50 -

2. Specialized Supplier The R2 of the model in this sector was pretty high and also confirmed that the increase in demand play most important role(strong positive effect) and innovation strategy also gives significant effect on employment dynamics. Innovation strategy for cost competitiveness was dominant and showed ,as expected, negative effect while technological competitiveness that was proxied through share of turnover from new product had no significant impact on employment dynamics. However, it was not enable to investigate the employment effect of the change in labour compensation. It was because only one industry has been included in this sector, hence, average wage data by industry has no variance. Since cost competitiveness showed significant negative impact on employment dynamics, proposition 2 has been proved by this result.

- 51 -

<Table 4-7> Determinants of employment growth- SS sector
Independent Variable constant Firm size Revenue growth(‘03~’05) Share of turnover from new product Share of firms innovating to reduce labour cost. R 2 (adj. R 2) F F change Durbin-Watson

.020 .053 .063

Model 1 SE Std. β t-value
 

1.630 .031   2.860   -.045 -.478 .053 -.001 -.010 1.053 .622 6.620*** .061 .639 6.944*** 1.010 .000 -.125 -1.340 1.036 .000 -.159 .392 (.374) 22.245*** -1.679* 1.075 .438 (.404) 13.034*** 2.717* 1.90

SE

β

Model 2 t-value

VIF

3. Scale and Information Intensive In this sector, R2 of the model 2 has not increased and F change was not significant hence it shows innovation strategies, neither technological competitiveness nor cost competitiveness gave significant impact on employment growth. Since R2 of the model 1 is higher that of the model 2, estimation of model 1 is more reliable and wage growth gave weak negative effect on employment ,hence, only H3.3 of Hypothesis 3 but remaining the others has been proven.

- 52 -

<Table 4-8> Determinants of employment growth- SI sector
Independent Variable constant Firm size Wage growth(‘03~‘05) Revenue growth(‘03~’05) Share of turnover from new product Share of firms innovating to reduce labour cost. R 2 (adj. R 2) F F change Durbin-Watson

.163 .037 .169 .019 .019

Model 1 SE Std. β t-value

.0 -.133 .286 .286
- 87

 

2.014 -1.118 -1.708* 3.673*** 3.673

.164 .041 .170 .019 .001

SE

β

Model 2 t-value
 

.0 -.125 .285 -.037
- 46

1.938 -.539 -1.603 3.657*** -.377
- 77

VIF

1.203 1.019 1.012 1.616

 

.001 -.076 .115 (.097) 6.391***

. 1 1.613

.124 (.093) 4.114*** 0.734 2.182

4. Supplier dominated This sector also innovation strategy did no significant role but only changes in demand(revenue growth) gave strong positive effect in employment dynamics and hypothesis 4 has not been proved by this results.

- 53 -

<Table 4-9> Determinants of employment growth- SD sector
Independent Variable constant Firm size Wage growth(‘03~‘05) Revenue growth(‘03~’05) Share of turnover from new product Share of firms innovating to reduce labour cost. R 2 (adj. R 2) F F change Durbin-Watson

.094 .048 .178 .069

Model 1 SE Std. β t-value

.1 1 -.028
- 3

 

.798 .096   -1.152 .049 -.143 -.245 .183 -.058 .001 .129 .001 .097

SE

β

Model 2 t-value

.516   -1.235 1.034 -.491 1.064
3 769

VIF

.431 3.777*** .070 .433

.

1.019

1.131 1.011 .814 1.099 .237 (.172) 3.665*** 1.005 2.051

.211 (.172) 5.438***

5. Comparative analysis with Bogliciano and Pianta(2010) This study followed the classification scheme and model of Bogliciano and Pianta (2010) however, for several reasons, it was not identically the same, and neither results were. First, the data set is different from theirs. In this study, only KIS 2006 data has been mainly used. Second, their taxonomy contains not only service but manufacturing sectors while in this study it contains
- 54 -

only service sectors of KIS 2006. Third, there must be big difference between EURO countries and Korean context and Fourth, their unit of analysis was industry level, while that of this study is firm level. In Bogliciano and Pianta(2010)'s study, innovation strategy influenced positively on employment in SB and this can be interpreted that upstream(other service or manufacturing) sectors' investment for process innovation or cost competitiveness strategy stimulated downstream SB sector's product innovation or technological competitiveness and expanded employment demand consequently. In other words, it is possible to assume that new machine compensation mechanism had worked well in the SB sector. Similarly, SB firms that I investigated showed the positive impact of technological competitiveness on employment. However, it is not certain if it is the result by industry level dynamics or just firm level ones since it is not industry level analysis. In the SS sector, there are two main source of innovation. One is about how flexibly it makes use of their technologies, or new services for their user industries and the other is about how strengthen the user-producer interaction and the tacit knowledge of their skilled workers(Bogliciano and Pianta 2007;82). The former is related with TC (a positive employment effect) and the latter is related with CC(a negative employment effect), which seems to be more dominant in these firms we investigated. While the most important factors for employment dynamics was the change in demand in SII and SD sectors, cost competitiveness strategy also gave a strong negative effect on employment in EURO countries,
- 55 -

neither technological competitiveness nor cost competitiveness strategy did not make any significant impact on employment in these sectors in this study. It is possible to assume that it is associated with the fact that these two sectors greatly fall behind of them in European countries in terms of innovativeness, hence, firms in these sectors showed no significant relation between innovation and employment because of it's low innovativeness In Korean SB sectors, change in revenue was an important positive driver for employment dynamics although it made no significant effect on employment in Bogliciano and Pianta(2010). It might be explained by that elasticity of employment is greater in service than manufacturing sector(Evangelista and Savona 2003) because this study includes only service firms while Bogliciano and Pianta (2010) includes both of service and manufacturing sectors.

- 56 -

<Table 4-10> Analysis summary and comparison with Bogliciano and Pianta(2010)
W

age

N N

ot significant

SB

**N **

egative (-)

SS

**N ***

egative (-)

SII

***N ***

egative (-)

SD

ogliciano and Pianta(2010)
B

Demand TC
CC W

ot significant *Positive (+)
N *

Positive (+) Not significant
**N

Positive (+) *Positive (+)
**N *N

Positive (+) Not significant
***N N

ot significant

egative (-)
N/

egative (-)

egative (-)

age

Positive (+)
***

A

egative (-)

ot significant

This Study

Demand TC
CC

Positive (+) **Positive (+)
*** N

Positive (+) Not significant
*N

Positive (+) Not significant
*** N

Positive (+) Not significant
*** N

ot significant

egative (-)
- 57 -

ot significant

ot significant

V. Conclusions and implications
In neo-schumpeterian approach, creation and destruction of employment can not be fully explained by normal product-like labour market mechanisms so I investigated diverse employment effect of each type of innovation strategy across industries. In summary, all Korean service firms in every sectors showed that the most strong factor for employment dynamics was the change in demand. Second, the employment effect of innovation strategy was different by sectors in Korea. In SB and SS sectors innovation strategy had significant effect on employment. TC made a positive (+) impact on firms in the SB sector and CC made a negative (-) one on employment. However, all the other sectors, including SII and SD, any kind of innovation strategy made no significant impact; it reflects the characteristics of Korean service industry, that the innovativeness of all but computer related(Science Based) services are weak and fall behind that of major European countries. Third, it was the same as Bogliciano and Pianta(2010) that technological competitiveness, which is linked to product innovation is positive and cost competitiveness, which is linked to process innovation, is negative on employment of firms in SB and SS sectors; and it is possible to expect that there would be different individual attitude toward innovation strategies at firms in SB and SS sector in terms of employment.
- 58 -

These results imply that stimulating technological competitiveness innovation strategy in science based firms would be effective in terms of increase in employment. There are some contributions of this study. Firstly, although a lot of former studies have estimated the employment effect of innovation via econometric scheme and production function but this study investigated it in a neo-schumpeterian way, and showed not only economic factors but also innovation strategies can play an important role in terms of employment dynamics. In addition, noticing unique characteristics of service industry, it focused only service firms and made groupings of Korean service industries and showed diverse employment effect of innovation across sectors. It is also meaningful to apply Bogliciano and Pianta(2010)'s model and classification to Korean service industries and analyze the similarities and differences between the two. However, there are some restrictions in this study also. First, it did not consider time lag between innovation and its consequences so inherently there are potential risks of the endogeneity problem. and in addition, this study concerned only the quantity of employment although technological changes can make skill bias impact on employment and give vast impact on the quality of employment as well.

- 59 -

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ABSTRACT

Innovation and Employment in Korean Service Sectors
Park, Song kun Department of Management of Technology and Innovation/ Management of Technology and Innovation The Graduate School Korea University of Technology Education I have analyzed the impact of innovation on the employment in the Korean Service sector using KIS 2006 data. This study is based on Bogliciano and Pianta(2010)'s model, which involves two main innovation strategies, technological competitiveness and cost competitiveness, as the main explanatory innovation variables for the employment dynamics. Empirical results show that an increase in demand was the strongest driver for an increase in employment in all four service sectors, including science-based, specialized supplier, size and information intensive, and supplier dominated. Innovation strategy appeared to have a significant effect on employment at the firm level; Technological competitiveness showed a positive effect on employment in science based firms while cost competitiveness appeared to give a negative effect in specialized supplier firms. The firms in size and information intensive sector showed that increase in wages gives negative impact on their employment.
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However, cost competitiveness did not give any significant effect on employment dynamics of firms in size and information intensive sector and supplier dominated sector. This finding is different from the research of Bogliciano and Pianta(2010) on the European countries. One possible explanation would be that innovation strategy does not affect employment of firms in these sectors since the level of innovativeness of these sectors in Korea fall behind that of European countries. In conclusion, these findings imply that stimulating technological competitiveness innovation strategy in science based firms would be effective in terms of increase in employment. ey Words : Technological innovation, Innovation strategy, employment, Service innovation
K

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