Innovation and Firm Performance An Empirical Investigation for Germa
The process of firms’ growth – in terms of productivity or employment – is a major concern of policy makers. In this context, innovations are considered to play a crucial role in stimulating firms’ performance. This book investigates this general hypothes
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4.1 Introduction Understanding and quantifying the driving factors behind productivity and productivity growth, and in particular the role of innovation activities in this context, has been of major interest in the field of empirical economics for several decades.76 This can be explained by the fact that innovation is widely believed to be a key long-term driving force for competitiveness and growth of firms and national economies as a whole. Recent years have even seen a surge of studies on productivity, in particular at the firm level. This is in part due to new theoretical underpinnings from the endogenous growth theory, which emphasises that economic growth is positively correlated with investments in research (see Romer, 1986; 1990) and human capital (Lucas, 1988). Another reason is the increasing availability of comprehensive micro databases. However, as was set out in section 1.2, quantifying the importance of innovation for productivity is a challenging task and, despite a large number of empirical studies, innovation research has only been partly successful (see Griliches, 1995; Bartelsman and Doms, 2000). One reason for this conclusion lies in the difficulties of adequately measuring innovation. For a long time, the empirical literature has focussed on input-oriented innovation indicators. The majority of these studies used the production function approach as a theoretical backbone, including R&D-based measures as an additional input factor. But it is a well-known fact that R&D is not the only way for an enterprise to introduce new products and processes. Furthermore, it is presumably not the input of innovation activities but rather their outcome that exercises influence over firm performance (see, ∗ 76
This chapter largely draws on Peters (2005b). Furthermore, there is a related group of studies focussing on the description of cross-sectional distributions of productivity across firms in an industry and its evolution over time (see, e.g., Nelson, 1981; Baily, Hulten, and Campbell, 1992; Bartelsman and Dhrymes, 1998).
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4 Productivity Effects of Innovation Activities
e.g., Blundell, Griffith, and van Reenen, 1993; Llorca Vivero, 2002). R&D or more general innovation expenditure translate into product as well as process innovations, both affecting productivity via different channels. However, the traditional approach treats the innovation process itself, i.e. the link between the resources devoted to the innovation process and their outcome, as a black box. Patents have been seen as an option to get over this shortcoming. But patent-based indicators have been heavily criticised as being a poor indicator of innovative output.77 Another problem in quantifying the impact of innovation on productivity at the firm level relates to the fact that only some of the firms are engaged in R&D or, more generally, in innovation activities, and the sample of innovative firms is unlikely to be random. It is well-known that a restriction to the selected (innovative) sample may induce biased estimates (Heckman, 1979).
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