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Performing a balancing act on the innovation tightrope

A company with greater flexibility when it comes to recruiting can be more innovative, but only up to a certain point, according to an Applied Economics study by the University of the Basque Country

Elhuyar Fundazioa

The formula for success in innovation is about finding the middle ground. Although some studies assert that the more flexibility a company enjoys when it comes to recruiting or firing workers, the less capacity it has for innovation, there are in fact subtle differences. This is the conclusion of a study carried out by researchers from Applied Economics Department V of the University of the Basque Country (UPV/EHU) and published in the Industrial and Labor Relations Review. "We have noticed that in the case of Spanish manufacturing, flexibility contributes positively towards innovative activity up to a certain threshold. In other words, the company has to have a certain degree of flexibility to handle the shocks taking place in demand, and technical change, although beyond this threshold the contribution of flexibility towards innovation is negative," explains Amaia Altuzarra.

Altuzarra is a member of the team of economists of the UPV/EHU that analyses the connections between the labour market, competitiveness and job creation. In this team she and her colleague Felipe Serrano focus on the microeconomic aspect: "On this occasion we tried to study which framework of labour relations is most suited to generating innovation and employment." These relations are determined by functional flexibility, which consists of the possibility of moving workers from one post to another, and by numerical flexibility, which refers to the capacity of companies to modify their numbers of workers or hours. Numerical flexibility is one of the cornerstones in this line of study.

They have established that the flexibility-innovation relationship is not in fact completely linear. Now the research is looking at whether this relationship varies depending on the team of workers the flexibility measures are associated with. Specifically, they are studying engineers/scientists on the one hand, and technical support staff, on the other; these are the two labour groups most closely linked to innovative activity.

The technicians, more than anyone

They used the Labour Market Census of the BAC (Basque Autonomous Community) and its results for 2000, 2004 and 2008. "This means we can study the various occupations, which enables us to open up a channel which is unusual in the literature," says Altuzarra. She points out that for practical reasons the study is limited to the manufacturing sector. Specifically, focus has been placed on the relationship between two aspects: the recruiting arrangements used by companies for the different types of workers, and the outputs obtained in the form of innovations (in the product as well as in the process).

The results so far have shown that the connection between innovation and numerical flexibility does in fact vary according to professional category, with the technicians being the most faithful to it. "For example, engineers and scientists on permanent contracts contribute positively towards the obtaining of innovations in the company. By contrast, technicians contribute more towards innovation when they are bonded to the company through temporary contracts. The company may use these workers to capture the external knowledge it needs to resolve specific, one-off problems, whereas the accumulation of more generic internal knowledge is done through the engineers and scientists," says Altuzarra.

Innovation is diverse

When talking about innovation within the company, there are many characteristics to take into consideration: contract type, training, structural elements (size), the sector and market structure (whether sales are made in the local, national or international ambit), etc. For example, "companies that gear their products towards the international ambit are more innovative, because the international markets are much more demanding."

Nevertheless, Altuzarra stresses that innovation can have different forms and that there is no one company type nor single model to be followed: "What we want to get over is that innovation is highly diverse and that different types of company co-exist within a single industrial base. What prospers on the markets is an innovative company irrespective of its size and the sector in which it is located, and a company in a traditional sector can be highly innovative." She admits that large companies usually have a greater capacity for innovation owing to the simple fact of having more resources available for investment, in R+D, for example. Nevertheless, the data in the BAC show that they are not the only ones: "There are small enterprises that have great dynamism and the capacity to adapt to the markets. We came across a group of companies (of between 50 and 100 workers) that are very dynamic, innovative and engaged in exporting."

With the research in the BAC well advanced, the challenge facing these UPV/EHU economists now is to test the same hypotheses in Spain using a Survey on Business Strategies. This is a database that gathers annual samples (that of the BAC, by contrast, is only updated every four years), and it spans the period between the 1990s and today. "We have a broad range of years to be able to conduct econometric analyses that are more robust," concludes Altuzarra.

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