The paper examines the link between technological change and demand and their impact on employment in manufacturing industry. The specific nature of innovation, mainly oriented towards product or process innovations, is considered, in the light of the competitive strategies of firms and industries. An interpretative model is proposed and an empirical analysis is carried out, using the data of the European Innovation Surveys for five countries. The results of cross-industry regressions show that demand, structural change and orientation toward product innovations have a positive impact on employment change in the 1990s, while the intensity of innovative expenditure (including R&D, design, innovative investment, etc.) has a negative effect. A more general comparison between Europe, the US and Japan is also carried out examining their productivity and employment performance, which can be seen as the result of the different orientation of technological change.