Digitalization and Employment in Europe: The Role of Size and the Complementarity of R&D

Abstract

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.The empirical research finds a contingent, slightly positive net effect on the relationship between digitalization and employment, resulting from the automation and reinstatement of jobs, the two countervailing forces revealed by the theoretical literature. We dig down at the features of this relationship, using two waves of Innobarometer surveys to capture the innovation investments of a sample of European enterprises in 2015 and 2016. Adding to previous studies, we identify an inverted U-shape between degrees of digitalization and employment; this effect is more prominent in small companies with fewer than 50 employees. The effect diminishes for very large companies. In addition, we show complementarity links between research and development (R&D) investments and digital ones proxied by investing in software development and acquiring hardware and software. Specifically, we find support for a positive association between employment and investment in information technology (IT) assets and R&D. On average, companies that invest in both IT and R&D have 11.5% more employees than those that embrace just one. While we observe that small companies that invest in either type of IT asset employ more people, at larger enterprises, the positive effect is only found when they invest in both. The study supports the findings using alternative regression methods, quantile, and Lewbel instrumental variables.