Revista Economic 67:2 (2015)

INNOVATION AS THE PATHWAY TO GROWTH. THE

CONNECTION WITH THE LABOUR MARKET
BURCIU Andreea1
University of Economic Studies, Bucharest, Romania

Abstract
The EU is crossing an era of challenges, while implementing a new set of
strategies meant to put it back on the map of competitiveness and economic power. The
boost of employment is one of the signs of prosperity after the economic crisis, while
innovation can be the one of the key factors to this growth. The paper aims to study the
links between innovation and employment using panel data models, on a time frame of
8 years.
Key words: labour market, innovation union, economic sustainability, panel data
analysis
JEL classification: J21, O30, O40

1.! Introduction
Innovation can be considered the "new economic engine". In this paper
my aim is to study whether innovation can be the answer for economic growth
and re-launch of the EU as a leader in the global markets and which are the links
between innovation and employment.
The European Commission defined in the past innovation like a
synonym for successful production, assimilation and exploitation of novelty in
the economic and social spheres, offering solutions to problems and making it
possible to meet the needs of both individuals and society. (EC, 1995).
Moreover, innovation can be the one providing sustainable prosperity

Ph.D. student, Department of Statistics and Econometrics, [email protected]

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(Grossman, 1994; Helpman, 1994; Baumol, 2002; Bhid, 2008) and a
competitive advantage.
Going through a phase of transformation, Europe is trying to catch up
and finally overcome the gap created by the economic crisis, which enlightened
many deficiencies. The fast changing environment, the progress of the emerging
markets, the aging population, the increasing resources' scarcity, plus the
territorial tensions around the globe bring in a series of factors that need to be
addressed as soon as possible. Adding up the unemployment, the shy energy
efficiency and a rather formal use of renewables, a weak inclusion policy and
many other factors, we can define the perfect framework for other than positive
outcomes.
Therefore, since 2010, in the middle of the rebound from the crisis,
Europe came up with Europe 2020 strategy which meant to solve as much as
possible these issues. This strategy has three priorities for smart growth (through
more effective investments in education, research and innovation); sustainable
growth (thanks to a decisive move towards a low-carbon economy) and
inclusive growth (with a strong emphasis on job creation and poverty
reduction). The strategy is focused on five ambitious goals in the areas of
employment, innovation, education, poverty reduction and climate/energy. (EC,
2015).
In 2000, the EU adopted the Lisbon strategy which failed in meeting
the target of 3% of the GDP to be allotted for research and development. In
2010, the target was preserved (for 2020), but it has different values for the
Member States, considering their evolution stage and development. For
example, for Romania, the target is set at 2% of the GDP to be allotted for R&D
by 2020. (Bria, 2015). Moreover, another target set for 2020 is to have an overall
employment rate of 75% for people between 20 and 64 years old. Therefore,
studying the evolutions of innovation and employment as assumed targets for
the EU's strategy may lead to a in-depth analysis of the status of EU and the
measures it took in order to fight the effects of the crisis.
Innovation Union, a flagship initiative under the Europe 2020 strategy,
is an integrated innovation strategy built around 34 specific commitments.
Based on a broad concept of innovation, regarding both the public and the
private sector, the initiative aims to improve conditions and access to finance
for research and innovation in Europe and to ensure that innovative ideas can
be turned into products and services that create growth and jobs. (EC, 2011).
The main issue of innovation at EU level is not considered to be the scientific
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area, which provides valuable results, but the way these outcomes are integrated
and transformed into industrial advantage.
This can impel productivity, resource efficiency and market shares. (EC, 2012).
Figure 1: Score of the Innovation pillar for EU-28 Countries

6
5
4
3
2
1
0

Score
Target

EU-28 Countries
Source: (World Economic Forum, The Global Competitiveness Report 2014 - 2015)

2.! Innovation and Competitiveness

Innovation and business sophistication are two of the 12 pillars included
in the Global Competitiveness Index (GCI) prepared by the World Economic
Forum. They both define the "Innovation and sophistication" sub-index.
According to the GCI's methodology, the business sophistication refers to the
quality of a countrys overall business networks and the quality of individual
firms operations and strategies. The methodology also states that the
innovation pillar focuses on technological innovation. Although substantial
gains can be obtained by improving institutions, building infrastructure,
reducing macroeconomic instability, or improving human capital, all these
factors eventually run into diminishing returns. (WEF, 2015)
I was interested to see which is the status in the GCI, regarding the
Innovation pillar, for all the EU-28 countries.
In the figure above, "Score" represents the aggregated score of the
Innovation Pillar for the year 2014. Finland has the highest innovation score,
5,57 points, being ranked the third in the world, after Switzerland and Japan
(score -5,68). Next, Germany, the second in the EU and the forth in the world,
being followed by the Netherlands and so on. The backward countries are the
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newest Member States of the EU, namely Romania (the 78th in the world, with
an aggregate score of 3,53), Croatia (the 87th in the world, with an aggregate
score of 3,47) and finally, Bulgaria (the 106th in the world with a score of 3,27).
The main competitors of the EU on the global market - the US (5th
place), China (33rd place), Japan (2nd place) and South Korea (22nd place) are
seriously challenging the competitiveness of the EU.
Six EU countries
reach the top 10 (Finland, Germany, Netherlands, Sweden, UK, Denmark),
while 16 are out of top 30. It is worth mentioning that while our competitors
take action as a single country, applying the same plans, policies and sharing
the same market and having only one budget, the EU had to create an
architecture in order to be more similar, as mechanisms, to a single economic
area. The Innovation Union, as a policy paper and guideline, comes to
enforce the vision of the 28 Member States in this field and to enhance the
availability of resources of any kind. Nevertheless, the economic profile, the
size, the history, the culture and the political factors of the Member States are
different and these are real challenges faced by the EU every day.
According to the European Commission, this gap between EU and the
others is caused by two main reasons. The first reason refers to the share of
high-tech manufacturing sectors in the EU's economy which, compared to US',
are decreasing. In addition, these sectors are less research-intensive in the EU.
A slower speed of change generates a lower offer of investments. On the other
hand, there has been registered an increase in the Chinese R&D intensity,
growing 30 times quicker than Europe. (EC, 2011).
Also, in Figure 1 I introduced the "Target" indicator which aims to show
which is the target for each EU-28 Member State for 2020 in terms of allotment
to research and innovation from the GDP. As previously stated, the overall
target is 3%. However 9 countries are at 3 and over 3% target (Finland, Sweden,
Austria, and so on) and 11 are below 2% target (Cyprus, Slovakia, Greece and
others). Regarding UK, there are no targets set, while for the Czech Republic
there is a 1% target set only for the public sector.
The Global Competitiveness Index classifies the world economies in
economies "factor driven" (countries compete based on their factor
endowments-primarily unskilled labour and natural resources), "efficiency
driven" (countries must begin to develop more efficient production processes
and increase product quality because wages have risen and they cannot increase
prices) and, finally, the third stage, "innovation driven" (when companies must
compete by producing new and different goods using the most sophisticated
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production processes and by innovating new ones). Between the three phases
are two transition areas. For the EU-28 Member States, according to GCI,
Romania and Bulgaria are in the "efficiency driven" economy phase, Lithuania,
Latvia, Hungary, Poland and Croatia are in the "transition period" from the
"efficiency driven phase" to the "innovation driven" phase. The other 21
Member States are the "innovation driven" economy phase, which indicates a
high level of development and a push factor for the other countries.
3.! Innovation and Employment
According to Innovation Union Competitiveness Report (EC, 2011),
the EU should create at least 1 million new research jobs in order to reach its
3% 2020 target. Not only that there is a need for a 2/3 increase in the number of
researchers, but they must adapt to the new market demands. The study also
brings into the limelight the fact that the EU researchers are more involved in
the public sector (54%) instead of private, as is the case in China (69%), Japan
(73%) or the US (80%). (EC, 2011)
Next, as this paper aims to study innovation as a solution for growth in
jobs and boosting opportunities for EU's workforce, it is interesting to find
which is the involvement of the workforce in this domain. It is well-known that
without qualified human resources able to cope with the new challenges, with
the competition of the other large economies and with the technological change,
the efforts may be futile.
Figure 2: The evolution of research and development personnel as a percent of
the total workforce

2
1

0,92 0,92 0,93 0,94 0,97

1,03 1,03 1,06 1,08

1,1

1,12

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EU (28 countries)
Source: (Eurostat)
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The above figure shows the evolution of the research and development
personnel as a percent of the total workforce at EU level. According to this data
from Eurostat, the percent of persons who worked in this area has grown every
year and includes all persons employed directly on R&D, as well as those
providing direct services such as R&D managers, administrators, and clerical
staff. Eurostat considers the OECD definition of researchers as professionals
engaged in the conception or creation of new knowledge, products, processes,
methods and systems and also in the management of the projects concerned.
4.! Methodology and data analysis
It was developed an econometric model meant to test and explain the
hypothesis that the evolution of the labour market is influenced by innovation.
In order to have a more accurate analysis of the phenomena, I chose using the
panel data analysis method which brings a double benefit: the behaviour of the
cross-sectional series and the time dimension. I applied a multiple regression
model for the panel data. The panel data analysis had the advantage of providing
superior estimates of a trend in a variable or indicator, summarising into one
coefficient the impact of a variable over a dependent variable group of time
series, grouping the dependent variable into categories.
I considered the unemployment rate (Unempl) as the dependent
variable, meant to capture the evolution of the labour market at EU level. During
the economic crisis, the unemployment rate varied very much and can be a
strong indicator for study. As independent variables, I took into consideration
8 factors that, according to the Innovation Union Scoreboard, define innovation
performance as an aggregate of the relative strengths and weaknesses of the
research and innovations systems (EC,2014).
The first factor is Human
Resources (HR) and is comprised of three sub-components: New doctorate
graduates, Population aged 30-34 with completed tertiary education and
Population aged 20-24 having completed at least upper secondary education. It
measures the high-skilled workforce.
The second variable considered is Open, excellent and attractive
research systems (RS) which is composed of the number of International
scientific co-publications, Scientific publications among top 10% most cited
and Non-EU doctorate students. It aims to aggregate the international
competitiveness of the science base.

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The next variable is the generic Finance and support (FIN) which
reflects Public R&D expenditure and Venture capital and reflects the degree of
financial support for research and innovation.
Firm investments (INVEST) are composed of Business R&D
expenditure and Non-R&D innovation expenditure, showing the money
invested by companies for this domain.
Linkages & entrepreneurship (ENT) has three components, namely
SMEs innovating in-house, Innovative SMEs collaborating with others and
Public-private co-publications, analysing the partnerships between SMEs and
the public sector in terms of promoting innovation.
Intellectual Assets (INTEL) wants to summarise the intellectual
property rights generated through PCT patent applications, PCT patent
applications in societal challenges, Community trademarks and Community
designs.
Innovators (INNOV) aims to measure the number of SMEs that
introduced
product
or
process
innovations,
that
introduced
marketing/organisational innovations and the Employment fast-growing firms
of innovative sectors.
Finally, the Economic effects (EFFECTS) indicator reflects the output
on the markets in terms of Employment in knowledge-intensive activities,
Contribution of the medium and high tech product exports to trade balance,
Knowledge-intensive services exports, Sales of new to market and new to firm
innovations and Licence and patent revenues from abroad.
The data was collected from Eurostat and regards the EU 28 countries
between 2006 and 2013, so that we can see the effect of the economic crisis
over their evolution. The main advantage is that the data is comparable as it
comes from the same source. The sample has 232 observations.
There are several types of panel data models, mostly used being the
pooled model, the fixed effects model and the random effects model. The pooled
model is the most simple, since it doesn't take into account the time dimension.
The fixed effects model provides estimates of specific coefficients (for the
constant term or for the independent variables) for each time series considered
as dependent variable. It can be used for a simple approach regression. The
random effects model is the most efficient of the three. It assumes that the
individual specific effects are uncorrelated with the independent variables. The
fixed effect assumption is that the individual specific effect is correlated with
the independent variables. (Codirlasu; Chidesciuc, 2008).
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For our analysis, we performed both the fixed and the random effects
model. In the end, in order to decide which one reflects the best analysis on the
available date, I performed the Hausman test for comparing the coefficient
estimates.
The initial equation of the model is the following
UNEMPL = C(1) + C(2)*HR + C(3)*RS + C(4)*FIN + C(5)*INVEST +
C(6)*ENT + C(7)*INTEL + C(8)*INNOV + C(9)*EFFECTS+
(1)

where C(1) is the free term, C(2) - C(9) represent the sensitivity of
Unemployment in connection with the 8 factors taken into consideration as
independent variables and residual variable. The parameters C(2)-C(9)
reflect with how many units Unemployment has changed while the independent
variables grew with only one unit.
Figure 3: EViews output for the fixed effects model

Source: (Own calculations)

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As this output shows, R squared (the coefficient of determination) shows
a strong correlation between unemployment in the EU-28 Member States and
the 8 independent variables included in the analysis. 68,49% of the variation of
unemployment is explained by these factors. However, some of the coefficients
are not significant, since their p-value is above 0.05 level.
The regression equation is the following:
UNEMPL = -4.805 + 7.634*HR + 24.029*RS - 8.984*FIN + 1.420*INVEST 4.685*ENT + 0.965*INTEL -6.900*INNOV + 19.327*EFFECTS
(2)

To sum up, the unemployment varies opposite to the finance and

support indicator which shows the degree of support in terms of funding
received by the innovation sector. Also, the RS indicator (Open, excellent and
attractive research systems) and the EFFECTS indicator (Economic effects)
influence the variation of the unemployment at EU level.
With regard to the random effects model, the equation (1) is also used.
The EViews output is the following:
Figure 4: EViews output for the random effects model

Source: (Own calculations)

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As this output shows, R squared (the coefficient of determination)
shows a rather weak correlation between unemployment in the EU-28 Member
States and the 8 independent variables included in the analysis. 22,31 % of the
variation of unemployment is explained by these factors. However, some of the
coefficients are not significant, since their p-value is above 0.05 level.
According to this model, the unemployment rate's variation depends on the HR
(human resources), the RS indicator (Open, excellent and attractive research
systems), FIN (Finance and support), INNOV (Innovators) and the EFFECTS
indicator (Economic effects).
The regression equation is the following:
UNEMPL = 7.429 + 11.380*HR + 10.675*RS - 7.793*FIN - 3.137*INVEST 5.654*ENT - 0.861*INTEL - 9.825*INNOV + 8.470*EFFECTS (3)

As mentioned before, the Hausman test will be used in order to decide

which of the models is viable for this set of data. The output shows that there
are significant differences between the coefficients of the fixed and random
effects model and indicates the necessity of using the fixed effects model.
5.! Conclusions

In a globalised economy, Europe is struggling to cope with the changes

required after the economic crisis. The European Commission has put in place
a series of policies meant to make this happen. Nevertheless, the results are still
far from the targets and the unemployment is high in many countries. The
particular profile of the European Union is one of the factors that may keep it
from progressing in a faster pace. The major challenges such as climate change
or ageing population require a holistic approach from the scientific and
technological cooperation. In this paper, I aimed to analyse which is the status
of innovation and its connection to the EU's competitiveness and also with the
employment. The panel data models showed a link between the variables that
compose the Innovation Union Scoreboard and the unemployment rate. Still,
the link is not as strong as expected, yet the unemployment varies with two out
of eight indicators included in the Scoreboard.
If we take into consideration previously proved models of economic
growth, innovation is a clear and sure answer for enhancing success and creating
new job opportunities, both by hiring workforce, but most by leading to new
niches and domains to be developed.
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6.! References
! !Archibugi, D.; Filippetti, A.; Frenz, M. (2013) Economic crisis and
innovation: Is destruction prevailing over accumulation?, Research
Policy, Volume 42, Issue 2, Pages 303314.
! Baumol, W.J. (2002) The Free-Market Innovation Machine:
Analysing the Growth Miracle of Capitalism, Princeton University
Press.
! Bhid, A. (2008) The Venturesome Economy: How innovation
sustains prosperity in a more connected world, Princeton University
Press.
! Bria, F. (2015) Growing a Digital Social Innovation Ecosystem for
Europe, European Commission, Directorate-General of
Communications Networks, Content & Technology. Available at
http://www.nesta.org.uk/sites/default/files/dsireport.pdf
! Ciriaci, D.; Moncada-Patern-Castello, P.; Voig, P. (2013)
Innovation and Job Creation: A sustainable relation?, Joint
Research Centre.
! Codirlau, A.; Chidesciuc, N.A. (2008) Econometrie aplicat
utiliznd EViews 5.1, Academia de Studii Economice.
! EC (1995) Green Paper on Innovation. Available at
http://europa.eu/documents/comm/green_papers/pdf/com95_688_
en.pdf
! EC (2011) Innovation Union Competitiveness Report 2011.
Available
at
http://ec.europa.eu/research/innovationunion/index_en.cfm?pg=home&section=competitivenessreport&year=2011
! EC (2012) A Stronger European Industry for Growth and Economic
Recovery.
Available
at
http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:52012DC0582&from=EN
! EC (2014) Innovation Union Scoreboard, Directorate-General for
Enterprise
and
Industry.
Available
at
http://ec.europa.eu/enterprise/policies/innovation/files/ius/ius2014_en.pdf
! EC (2014) Research and innovation as sources of renewed growth,
Directorate-General for Research and Innovation.
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! EC (2015) Europe 2020 in a nutshell. Available at
http://ec.europa.eu/europe2020/europe-2020-in-anutshell/index_en.htm
! Eurostat (2015) How is the European Union progressing towards
its Europe 2020 targets?, Eurostat Press Office.
! Grossman, G.; Helpman, E. (1994) Endogenous Innovation in the
Theory of Growth, Journal of Economic Perspectives 8(1), p. 2344.
! Jula N.; Jula D. (2013) Modelarea economica: modele
econometrice si de optimizare, Bucuresti: Mustang.
! Mihai, M.; ian E. (2013) Education and Innovation in the Context
of Economies Globalization, Procedia Economics and Finance.
! WEF (2014) The Global Competitiveness Report 20142015.
Available
at
http://www3.weforum.org/docs/WEF_GlobalCompetitivenessRep
ort_2014-15.pdf
Acknowledgement
This work was co-financed from the European Social Fund through
Sectorial Operational Programme Human Resources Development 2007-2013,
project number POSDRU/159/1.5/S/134197 Performance and excellence in
doctoral and postdoctoral research in Romanian economics science domain.

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