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Young Innovative Companies Drive Employment Growth in the Pakistani Textiles Sector

Firm growth is an important dynamic underlying the process of structural change in developing countries. The transition of a firm from smaller to larger size typically involves technological upgrading towards higher value added activities and the exploitation of economies of scale. In the process, growing firms generate employment opportunities for the young labor force that enters the labor market in vast numbers in developing countries. For these reasons, researchers from the Lahore School of Economics have attempted to investigate the role of innovation, in interaction with size and age, for the employment growth of firms active in the textiles and apparel industry in Pakistan. For the analysis, the data of a unique innovation survey was used, which was conducted in 2015 on a sample of textiles and apparels manufacturers in twelve districts of Pakistan.

Findings from this research support the hypotheses that smaller and younger firms grow faster. Even though innovation in developing countries is generally described as incremental in nature and closely related to the development of technological capabilities to catch up with frontier technologies, the researchers found indigenous innovation efforts to be an important driver of employment growth of firms in the textiles and apparel sectors of Pakistan.

Further, it was found that the combined effect of small size, young age, and innovation raises growth even further. These results back up the presumption that Young Innovative Companied (YICs) engage more heavily in risky innovation activities and produce more radical innovations than incumbent firms, pushing their growth performance above that of incumbent innovators. The data confirmed that YICs were more intensively engaged in innovation activities and introduced more radical innovations. It is mainly continuous R&D (for employment and sales growth) and higher innovation investment intensity (for employment growth) which are innovation activities leading to high growth, especially among young innovative firms. These findings also suggested that while the self-reported technological innovation is useful to distinguish between more innovation active firms and non-innovators, performing R&D in-house on a continuous basis and with higher intensities were better indicators related to employment creation, especially for smaller and younger companies. Findings also revealed that innovative firms not only display higher growth rates, but also create more jobs in absolute terms.

An important policy implication that arises from this analysis is that: since small, young, innovative companies are particularly conducive to employment generation they can be considered as good candidates for targeted support tailored to sustain their entry and growth. Relaxing the binding constraints to innovative entrepreneurs and young innovative companies may be an effective way to boost employment.

This research was carried out by Azam Chaudhry, Professor & Dean, Department of Economics, Lahore School of Economics, Waqar Wadho, Assistant Professor & Senior Research Fellow, Lahore School of Economics and Micheline Goedhuys, Senior Research Fellow at the United Nations University (UNU-MERIT), , The Netherlands.