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Firing Costs and the Decoupling of Technological Invention and Post-Invention Investments

We document the decoupling of invention and post-invention investment in the US. Decoupling began in the 1970s as states adopted employment protection laws that increased firing costs and played a significant role in jobless growth, the vertical and geographical fragmentation of firm activities, and underinvestment relative to Tobin’s Q. Technological inventions lead to employment growth, but employment protection laws almost fully moderate this positive effect, especially in fast-changing and high-offshore industries and for radical inventions. Firms responded to the increased firing costs by pursuing less-novel inventions, factor substitution toward capital, and offshoring through international acquisitions and JVs with manufacturing partners. Our findings suggest that decoupling serves as a critical context under which these drivers of jobless growth emerged in the 1990s and that firms aggressively manage complementary in upstream-downstream resources by adjusting geographical and vertical boundaries of the firm.