Discussion Paper No. 275 of 2021 on Effect of Innovation on Employment Among Manufacturing Firms in Kenya

Abstract

Statistics available at the Kenya National Bureau of Statistics provide evidence that Kenya is struggling with high unemployment rates, an occurrence that is likely to be aggravated by an expanding labor force as a result of the expanding national population. The country has also identified manufacturing as a key sector in driving economic growth and development and thus it ought to benefit the economy in addressing the unemployment problem. Moreover, the country has shown relentless efforts in scaling up its innovative activities. Nevertheless, previous empirical work lacks consensus on how innovation affects employment across various countries and sectors. Thus, this study sought to examine how employment responds to product and process innovations among manufacturing firms in Kenya. The study used balanced panel data covering 100 manufacturing firms in Kenya. This data was for two waves which are 2013 and 2018 extracted from the World Bank Enterprise Survey database. The paper decomposed innovation into product and process innovation. The paper estimated static labor demand function using Pooled Ordinary Least Squares. Particularly, from the pooled OLS, employment among firms with product innovation was found to be 31.3% higher compared to the firms with product innovation while it was 13.2% higher among firms with process innovation compared to those without. From the random effects model, employment among firms embracing product innovation was 27.4% higher compared to forms without product innovation while it was 9.1% higher among forms with process innovation compared to those without. The findings suggest the need for different stakeholders to put innovation especially product innovation among manufacturing firms on the forefront as this will aid in the fight against joblessness in Kenya.