Export performance and labour flexibility in Schumpeterian innovation models

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Abstract

The euro currency is facing a crisis which raises doubts about Euro-trade area survival (Barber, 2010). Among the European Union member states, Southern European countries (including Ireland), currently face a difficult economic situation (Barber, 2010). There is evidence of a large gap between ‘North’ and ‘South’ Europe in terms of trade balance as Germany and the Netherlands have a strong export surpluses, while the southern countries have faced strong import penetration in the last decade. It is argued that the latter countries should adopt severe austerity measures (Zaidi, 2010), imposed by the EU according to the stability and growth pact of Dublin (Turrini, 2004). The application of austerity measures implies reforms towards making the labour market more flexible and achieving downward wage flexibility (Berthold, 1999). We focus our attention on the relations between labour markets, innovation activity and trade within the EMU (European Monetary union). Investments in Research and Development (R&D) have a positive impact on exports (Kleinknecht, 2002). It is argued that this relation is also valid in the opposite direction; that export drives innovation. There is therefore a mutual link: “winners keep winning”. Conversely, import surpluses have a negative impact on innovation, and limited investments on innovation have a negative impact on export: “losers keep losing”. Against this background, we have doubts about the austerity measures imposed by the European Union. We focus our attention particularly on the effects of export performance influenced by an increase in the flexibilization of the labour market and we assume that an easy ‘hire and fire’ of the employees has several effects in terms of acquiring or losing ‘tacit knowledge’ in an organization (Andriessen, 2005). Tacit knowledge and innovation activity are strictly intertwined (Senker, 2008) and we address innovation activity from a Schumpeterian perspective (Breschi, Malerba et al. 2000). The two Schumpeterian innovation models (small entrepreneurial firms and large organizations) will be defined and a taxonomy aimed to classify the innovation activity of an organization is developed. We argue that an increase in labour flexibility has opposite effects on the two Schumpeterian innovation models, and there is evidence of this relation in the taxonomy tables, showing a link between the degree of labour turnover inside an organization and the Schumpeterian taxonomy. We argue that governmental reforms related to the labour market at the macro-level, might have opposite effects at the firm-level in terms of export performance, depending on whether a firm shows typical Schumpeter I or Schumpeter II characteristics. In order to investigate the validity of our theory, ten hypotheses have been formulated and tested through the data analysis of the OSA database, a collection of data from 1300 Dutch companies collected over the last two decades. Four econometric models are formulated with particular attention addressed to the impact of variables indicating labour flexibility or labour turnover and their interaction with the two Schumpeterian innovation models on export performance. This research is aimed at investigating the relations between export performance and its determinants, such as R&D intensity and labour flexibility as key determinants. The determinants of export performance are derived from a survey of the theoretical and empirical literature. According to the observations and the empirical analysis of the results, significant determinants of export performance are addressed as well as recommendations and limitations for firms. The main result of the data analysis is the positive relation between a high level of flexible labour and export performance in typical Schumpeter I firms. In other words, firms showing typical Schumpeter I characteristics and adopting a high level of labour flexibility are more successful exporters. On the other hand we find a negative relation between a high level of flexible labour and export performance in typical Schumpeter II firms. In other words, firms showing typical Schumpeter II characteristics that adopt a high level of labour flexibility, are less successful exporters. This raises some doubts about the effectiveness of the austerity measures imposed by the EU. Such reforms could paradoxically have harmful consequences for the long-term export performance of Mediterranean countries and cause even deeper problems.