Employment stability and corporate innovation

ABSTRACT

We present a novel measure of firm-level employment stability, defined as one minus a firm’s employment elasticity with respect to its sales. We find that employment stability is positively associated with innovation output, measured by the number of patents and subsequent citations, and the originality and generality of the patents. Our findings suggest that employment stability enhances employees’ incentives for innovation by providing tolerance for failure.

KEYWORDS:

• Employment stability
• innovation
• tolerance for failure
• patenting

JEL CLASSIFICATION:

• G30
• J20
• O31

Acknowledgments

This work was supported by the new faculty research support fund of the College of Business School at Hongik University. We thank Hyunseob Kim for valuable discussions and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The sample period refers to the period during which we collect independent variables. We end the sample period in 2003 to address the truncation problem of patent data. We cannot observe patents that were applied for but still under review in 2006. To address this issue, we only use patent data up to 2004 considering there is, on average, a two-year lag between a patent’s application date and grant date.

² log(Pat) is the natural log of one plus the number of patents; log(Cit) is the natural log of one plus the number of subsequent citations; Originality and Generality are defined in Section 2.2.