Work arrangements and Firm Innovation

his study investigates the relationship between labour market flexibility—proxied by the proportion of workers with different contractual arrangements and other indicators of flexible work relations—and firms' innovative ability, as measured by the percentage of new products in total sales. On the one hand, 'more flexibility' (e.g. a higher labour turnover) might be favourable to a firm's innovation potential. Aside from having (potential) wage savings, a larger inflow of new personnel may enrich the pool of firm innovative ideas. On the other hand, higher work flexibility may also have some drawbacks: a permanently high turnover rate may diminish social cohesion and trust and increase the probability of opportunistic behaviour. Results suggest that internal flexibility is positively associated with innovation for both high-tech and low-tech firms. Especially for high-tech firms, however, greater external flexibility might hinder innovation.