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Italian manufacturing firms have been losing ground with respect to many of their European competitors. This paper presents some empirical evidence on the effects of innovation on employment growth and therefore on firms' productivity with the goal of understanding the roots of such poor performance. We use firm level data from the last three surveys on Italian manufacturing firms conducted by Mediocredito- Capitalia, which cover the period 1995-2003. Using a modified version of the model proposed by Harrison, Jaumandreu, Mairesse and Peters (2005), which separates employment growth rates into those associated with old and new products, we provide robust evidence that there is no employment displacement effect stemming from process innovation. The sources of employment growth during the period are split equally between the net contribution of product innovation and the net contribution from sales growth of old products. However, the contribution of product innovation is somewhat lower than that for the four comparison European countries considered by Harrison et al.

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