MITSloan: How stronger labor laws can foster innovation

MIT Sloan Management Review recently posted about a new working paper from Researchers Viral Acharya, Ramin Baghai-Wadji, and Krishnamurthy V. Subramanian. Their findings (based on their study of labor laws and patents and citations from the US, Germany, UK, France and India) suggest that national labor laws that make it harder to dismiss employees have a positive effect on innovation — and even on economic growth.

The authors report that they found evidence that strong labor laws in general foster innovation but have a negative effect on economic growth. However one aspect of such laws — more stringent laws regulating employee dismissal — had a strong positive effect on both innovation and economic growth in a country.
Why would laws that make it more complicated for employers to let workers go have a positive effect on innovation? One reason, the authors suggest, is that such laws may make employees more willing to take the greater risks associated with attempting innovation.

This topic sparked my interest, but I do wonder about their conclusions… Here are my thoughts. What do you think?

First, it seems like the study defines innovation and innovativeness based on inventions. While it is true that a patent’s value is measured through the number of citations, I don’t equate patents to innovation. Successful commercialization of patents is what drives economic value.

Also, there is no universally accepted definition of innovation or how to measure innovativeness. Take a look at few of the recent studies measuring global innovation.

INSEAD recently announced findings on its Global Innovation Index (GII) study that evaluates and ranks innovation readiness in countries based on technological sophistication, human capacity, infrastructure and other parameters. The top 10 countries are: US, Germany, Sweden, UK, Singapore, South Korea, Switzerland, Denmark, Japan and Netherlands.
The Boston Consulting Group (BCG), the National Association of Manufacturers (NAM), and The Manufacturing Institute (MI) recently released a research study that looked at both the business outcomes of innovation and government’s ability to encourage and support innovation through public policy. Based on this study, the top 10 innovative countries are: Singapore, South Korea, Switzerland, Iceland, Ireland, Hong Kong, Finland, United States, Japan, and Sweden. Note that survey mainly took place within the NAM members. For more information, you can access the report here: The Innovation Imperative in Manufacturing: How the United States Can Restore Its Edge.
Forrester Research evaluated 26 nations’ innovation capabilities and ranked Finland, Ireland, Sweden, Switzerland and US highest.

BusinessWeek also tracks the World’s Most Innovative Companies. Here is their score card for 2008 analysis. Given various studies and differing results, it seems to me that there is a natural linkage and a bias that is unavoidable in these studies.

This study also reminds me about the university tenure system. This system was created to protect professors and provide an environment where they can think and speak freely without the fear of reprisal. However, as was quoted by Derek Bok (former President of Harvard University), the system hasn’t been too fruitful.

Armed with the security of tenure and the time to study the world with care, professors would appear to have a unique opportunity to act as society’s scouts to signal impeding problems… Yet rarely have members of the academy succeeded in discovering emerging issues and bringing them vividly to the attention of the public.

There are many factors to consider when evaluating validity of a research study. In the end, it is important to keep an open mind and recognize that for every supporting fact you can probably find contrary evidence to establish reasonable doubt. Regardless, it does spur interesting discussion.