INNOVATION AND PRODUCTIVITY:
A Firm Level Study
of Ukrainian Manufacturing Sector
Tetyana Pavlenko and Ganna Vakhitova
Kyiv School of Economics
Kyiv Economic Institute
International conference on innovation, competitiveness and growth
Zargeb, November 27, 2008
Motivation
Innovation as a major growth factor
•
•
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Ukraine, 2000-2008 – cheap production inputs and high demand on export, not any
longer!
Alternative – technological changes (Romer, 1986; Griliches and Lichtenberg, 1984;
Aghion and Howitt, 1998; Zachariadis, 2003)
Additionally – innovation spillovers to private and public sectors ((Griliches, 1992;
Griffith, 2000; Bernstein and Nadiri, 1991)
Innovations in Ukraine
•
•
government R&D expenditures < 60% of the EU25 average
business R&D expenditure - only 31% of the EU25 average
Motivation
Our goal
•
Study the impact of innovation on productivity in Ukraine:
– probability of innovative activities and intensity of innovation expenditures;
– innovative efforts & innovation output;
– innovations & labor productivity
•
Test “success breeds success” hypothesis
Literature review
•
Cohen and Klepper (1996) summarize earlier findings
– Larger firms are more likely to invest in R&D
– R&D intensity does not vary with the firm’s size
– Innovation input positively related to innovation output
– Innovation output positively impacts firm's productivity
•
Griliches (1995) – impact of R&D on firm’s productivity and profitability within a CobbDouglas production function framework.
Pakes and Griliches (1984): importance of “the knowledge production function”.
Crépon, Duguet and Mairesse (1998) a four-equation model (CDM model):
– selectivity equation,
– innovation input (R&D),
– innovation output,
– and firm’s productivity equations.
Griffith et al. (2006) modified CDM model: all firms, dummy variables for product and
process innovations
•
•
•
Literature review
Empirical studies
• Developed European countries, CDM model, CIS surveys:
– Lööf and Heshmati (2003) for Norway, Finland and Sweden,
– Lööf and Heshmati (2002, 2006) for Sweden,
– Janz et al. (2003) for Germany and Sweden,
– Griffith et al. (2006) for France, Germany, Spain and UK.
– In all abovementioned countries – positive relationship between innovation input
and innovation output as well as between innovation output and firm’s
productivity (exceptions: Finland and Germany)
– Product innovations – 6% in France, UK, 17.6% in Spain
– Process innovations – 7% in France only.
Literature review
Empirical studies
• Developing countries:
– Benavente, 2006 for Chile
– Chudnovsky et al., 2004 for Argentine
– Raffo, 2007 for Latin-American countries
Similar results:
– Larger firms are more likely to invest in R&D
– R&D intensity does not vary with the firm’s size
– R&D increases with market share
Different results (explained by substantial lags):
– Innovation input has no impact on innovative sales
– Innovative sales do not affect productivity
Literature review
Empirical studies
• Transition countries:
– Masso and Vahter, 2006 for Estonia (CDM model, CIS4, followed Griffith et al.,
2006)
– Roud, 2007 for Russia (similar to Janz et al., 2003)
– Damijan, 2005 for Slovenia (panel data, followed Crepon et al., 1998)
•
Findings of those studies overall are in line with those for developed European
countries. Coefficients are larger.
•
•
in the case of Estonia only process innovations are significant (12-22%)
in case of Russia only product innovations positively contribute to productivity.
Literature review
“Success breads success”:
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•
technological opportunities
“Innovations improve technological opportunities and thus stimulate future
innovations” Mansfield, 1958, Stoneman, 1983; Nelson, 1988
internal funding
“Innovation increases sales, thus providing internal funds for further innovations”
Nelson and Winter, 1982
Methodology
Griffith et al., 2006
*
1
if
y
 β0 X 0 i  ε0 i  c

0i
y0 i  
*
0
if
y
 β0 X 0 i  ε0 i  c

0i
y1i  1 X 1i  y3i , t 1   1i
if y0 i  1
(1)
(2)
y2 i   2 yˆ1i   2 X 2 i   2 i
(3)
y3i   3 yˆ 2 i   3 X 3i   3i
(4)
Our modifications:
(1) Dummy for last year innovation success
(2) Last year productivity – dynamics
(2) Dummy for last year innovation expenditures
(3) Dummy for last year innovation success
Data
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•
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2006-2004
Manufacturing firms (NACE 10-41)
Statistical reports collected by the State Statistics Committee of Ukraine
(Derzhkomstat)
•
Random draw of 2000 firms from the list of firms which operated in 2004-2006 and
reported NACE10-41 in either year
Excluded 556 firms that switched sector in either year
Excluded 652 observations with missing values, zero sales or zero employment
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•
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Sample size – 792 firms
Innovative firms – at least one product or process innovation in a considered year,
14.4%
Descriptive statistics, 2006
Sales in 1000s UAH
66 412.73
Sales per employee in 1000s UAH
149.51
Sales from innovative products
0.0330
R&D investment
0.0109
Physical capital investment
0.0980
Employment
331
R&D employment
0.0040
University educated
0.1843
Descriptive statistics, 2006
Innovative firms
0.1437
Continuous innovators
0.0958
Product innovators
0.0983
Process innovators
0.0630
Product & Process innovators
0.0365
Own R&D
0.0567
Continuous own R&D during 2004-2006
0.0378
Purchased new equipment
0.1046
Purchased new technologies
0.0239
Government funding during 2004-2006
0.0113
Descriptive statistics
Most important market:
- market within Ukraine
0.9319
- CIS countries
0.0201
- other international market
0.0479
Newly established during 2004-2006
0.0264
Downsized during 2004-2006
0.0378
Empirical results
Variables
selection
***
innovation input
Firm size
0.552
-0.247
Human capital
0.19
Government funding
2.400
Newly established
0.853
Downzised
-0.556
3.831
Markets of CIS countries
-0.253
1.382
Markets of other countries
-0.289
-0.145
Market concentration
-2.001
-1.91
Previous success
1.812
3.579
***
**
***
2.328
*
***
1.018
***
*
**
Innovation_expenditure_2005
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1.129
Process innovation
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0.833
Productivity_2005
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0.451
Inverse Mills’ ratio
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0.0727
**
**
Empirical results
Variables
Product
innovations
Process
innovation
Productivity
Firm size
0.3257***
0.7527***
Previous success
1.7243***
0.2889
-
Government support
-0.4736
-0.7395
-
Newly established
0.7242
-0.0969
-0.2072
Downzised
-2.3126***
-4.0945***
-0.3352**
CIS countries
-0.8108*
-1.4514***
-0.0521
Other countries
0.1187
0.2395
-0.3701***
Market concentration
-3.2432
-9.3383
Physical capital investment
-
-0.0759
0.2251***
Human capital
-
-
1.6477***
Predicted innovation input
0.2562***
0.9141***
0.0715**
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-
Predicted product innovation
-
-
-0.2053
Predicted process innovation
-
-
1.1369***
Conclusions
Four sets of results:
• factors determining firm’s choice to invest resources in innovation activities;
• determinants of intensity of innovation expenditures.;
• contribution of innovation output to labor productivity;
• test for the “success breeds success” hypothesis.
Conclusions
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Success indeed breeds success:
– firms with positive experience in producing innovation are more likely to spend
more on innovation;
– firms that were successful in introducing product innovations in the previous
periods are more likely to become product innovator in the current period.
•
•
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Process innovation is a contributor to productivity
Evidence of two-way relationship between innovation input and productivity
State support matters on earlier stages (only?)