In our article “Employee Representation and Innovation – Disentangling the Effect of Legal and Voluntary Representation Institutions in Germany,” I examine how different forms of employee representation shape innovation in German companies. My research pays special attention to the distinction between statutory works councils and voluntary representation bodies, with a particular focus on the unique advantages offered by voluntary forms of representation.
Technological progress is essential for economic growth and the competitiveness of every firm. Find out more about the relationship between employee representation and product as well as process innovation in our latest SFB 823 discussion paper No. 04/2019.
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.
What Is Voluntary Representation?
Voluntary representation bodies are initiated by management rather than mandated by law. Unlike statutory works councils, which are elected by the workforce and have formal legal rights, voluntary bodies are more flexible, adaptable, and tailored to the specific needs of the company. They often arise from a proactive management approach, aiming to foster open communication and collaboration with employees.
Research Approach
To assess the impact of these different forms of representation, I analyzed panel data from the German IAB Establishment Panel (2010–2016) using advanced econometric methods. This allowed me to explore how both statutory and voluntary representation influence incremental and radical product and process innovations.
Key Findings: The Power of Voluntary Representation
The results of my study highlight the exceptional impact of voluntary representation on innovation. I found that voluntary representation bodies significantly enhance both incremental and radical innovations, as well as process innovations. This positive effect is even more pronounced when accounting for endogeneity, suggesting a strong and likely causal relationship.
In contrast, statutory works councils mainly support incremental innovation and have a limited effect on radical or process innovations. The bureaucratic and formalized structure of works councils may explain their focus on maintaining existing practices rather than driving transformative change.
Why Voluntary Representation Works
I believe the strength of voluntary representation lies in its flexibility and adaptability. Because these bodies are not bound by strict legal frameworks, they can be designed to fit the unique culture, strategy, and innovation goals of the organization. Voluntary representation encourages open dialogue, rapid decision-making, and a collaborative atmosphere where new ideas can flourish. This environment is particularly conducive to radical and process innovations, which often require breaking away from established routines and embracing new approaches.
Substitutive Relationship
My research also reveals that firms tend to choose either a works council or a voluntary representation body, but rarely both. This substitutive relationship suggests that while both forms serve to represent employee interests, voluntary representation is especially effective when innovation is a strategic priority.
Implications for Organizations
The findings of my study have important implications for business leaders and policymakers. I strongly advocate for the adoption of voluntary, management-initiated employee representation structures in organizations aiming to boost innovation. Even without formal legal rights, these bodies can play a pivotal role in fostering both incremental and radical change. Their alignment with company objectives and their ability to adapt quickly make them powerful drivers of innovation.
Conclusion
In conclusion, my research demonstrates that voluntary employee representation offers significant advantages for organizations seeking to innovate. By embracing flexible, participative structures tailored to their specific needs, companies can unlock the full creative potential of their workforce and drive sustained, meaningful innovation.
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