Workers’ Replacements and Firms’ Innovation Dynamics: New Evidence from Italian Matched Longitudinal Data

In this paper, we explore the impact of a firm's workers’ replacements on innovation performance by using rich matched employer–employee panel data for the Veneto region of Italy. We take the well-known resource-based theory of the firm as our departure point, and develop a set of hypotheses which we test empirically with negative binomial regressions. We find that workers’ replacements significantly dampen innovation performance, coherently with the idea that they generate losses in the tacit knowledge base of the firm. We also find that workers’ replacements are especially detrimental to large and young firms, possibly because large companies benefit comparatively less from ‘diaspora’ effects and because innovative capabilities in young firms are mostly dependent on specific human capital. Finally, our results show that firms’ location in industrial districts significantly mitigates the negative impact of workers’ replacements, and that a similar picture emerges when firms are more exposed to knowledge spillovers, particularly of related knowledge.