Association for Public Policy Analysis & Management

While much has been written on the Schumpeterian distinction between product and process innovation, relatively little is done on the empirical assessment of various consequences of such different types of innovation. In particular, innovation scholars are greatly interested these days in the paradoxical result of R&D investment in matured economy and the potential displacement of jobs and skills by technological innovation in the face of such emerging technologies as artificial intelligence and machine learning.

This paper examines the effects of product and process innovation on the labor demand with the panel regression analysis of South Korean manufacturing industry (1996~2015). Ranking the top in the world in terms of the share of GDP spent on R&D (4.15%) to be the first-mover yet suffering from high youth unemployment rates and performance disparity by firm size, South Korea provides a great example of how innovation activities lead to more or less demand for labor.

Our empirical analysis reveals that process innovation increases the profits of the manufacturing firms, which are in turn inversely correlated with labor demands. In addition, product innovation shows a similar effect, contrary to some of the previous studies finding the opposite effect of product and process innovation. We also examine the innovation activities and labor demand by firm size, finding that small and medium-sized enterprises which have depended more on purchasing technology tending to invest more on process innovation have increased their demand for labor by non-regular workers, while labor demand has declined in large firms generally investing more on product innovation.

One of the critical implications of this study is concerned with the roles of government in mediating the effects of technological innovation. The developmental-state thinking pervasive in the South Korean R&D has long dictated the government to play a role of a “system administrator,” but now with rapid technological innovation and the proliferation of innovation agents it is increasingly called upon to become a “system coordinator” to reconsider the current R&D support for small and medium manufacturers’ innovation and demand sophistication for large firms’ innovation.