Employee representation and innovation – disentangling the effect of legal and voluntary representation institutions in Germany

Abstract

This paper studies the effect of employee representation bodies provided by management on product and process innovations. In contrast to statutory forms of co-determination such as works councils, participative practices initiated by management are not equipped with any legally granted rights at all. Such alternative forms of employee representation are far less frequently and thoroughly analyzed than works councils. We compare the effects of these co-determination institutions established voluntarily with those initiated on a legal basis on different kinds of innovation measures. We differentiate between process and product (incremental and radical) innovations. To tackle endogeneity, the estimations are based on recursive bivariate and multivariate probit models. Results show that employee representation provided voluntarily by management supports incremental as well as radical product and process innovations. The effect is much more pronounced when endogeneity is taken into account. Works councils, however, only exhibit a positive effect on incremental innovations. Moreover, the results point to a substitutive relationship between both types of employee representation.