889 3rd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH ( 3rd ICBER 2012 ) PROCEEDING 12 - 13 MARCH 2012. GOLDEN FLOWER HOTEL, BANDUNG, INDONESIA ISBN: 978-967-5705-05-2. WEBSITE: www.internationalconference.com.my EFFECTS OF R&D EXPENDITURE ON EMPLOYMENT GROWTH: A DYNAMIC PANEL ANALYSIS Rusmawati Said a , Aznita Samsi and W.N.W Azman Saini Faculty Economics and Management University Putra Malaysia rus_said@yahoo.com, aznita@uum.edu.my, wazman@econ.upm.edu.my ABSTRACT This paper estimates the effects of research and development (R&D) expenditure on the employment growth in Malaysian manufacturing sector during the period 2000 to 2008. Theoretical literatures devote the link between R&D and employment structure tends to suggest technological change has positive effects on job. Using dynamic panel GMM system estimation and 3 digit industry levels from manufacturing survey over the period 2000 to 2008, this paper find there is negative and significant relationship between R&D expenditure and employment growth. This is true when we consider with the second lag of the variable. Employment growth in Malaysian labour market however still favour to labour oriented and the absorption of the new technology is consideredlow. Field of Research: R&D, Labor Force and Employment, and Technological Change. -------------------------------------------------------------------------------------------------------------------------------------------------------------------- 1. Introduction This paper estimates the effect of research and development (R&D) on employment at the industry level using a dynamic panel approach. Research and development is considered to be an important factor to stimulate growth and enhance productivity. The relationship between research and development and employment is remains unclear and thus calls for an empirical work. The relationship can be explained through two main channels. Firstly the direct effects of employment. The effects is clear through product and process of research and development at firms level which is depend on the types of research and development. Katsoulacos et.al (1986) contributes the theoretical reason and stress the importance of distinction between product and process of R&D at firm level. Product innovations lead to new products on the market which stimulate new demand and automatically increase the demand for labour at particular industries. Therefore the direct effects of product innovations on employment should be a positive relationship. Secondly, the indirect effects of research and development on innovators’ employment. This situation depends on the state of the technology that determines how much R&D improves productivity and demand condition that can induce different dynamic effects. As Lachenmaier and Rottmann (2011) argue that, if a firm introduces a product which is new to the market, there is no direct competitor and there is no employment effects until the firm exploit monopoly power and maximize its profits. This situation can lead to a decreasing in output and thus to a reduction in employment. The worst case of relationship can be explained if the new products are substitutes for existing products of the firm. The new workers can simply replace old workers or the new product required new technology and fewer workers. Hence the overall effects of R&D on employment are unclear in theory.