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Innovation,patents,andproductivityinfirms
BronwynH.HallUniversityofMaastrichtandUC
Berkeley
April2013 IndustryCanada 1
Abigtopic beginwithdefinitions Innovation:theimplementationofaneworsignificantly
improvedproduct(goodorservice),orprocess,anewmarketingmethod,oraneworganisational methodinbusinesspractices,workplaceorganisation orexternalrelations.(OsloManual,OECD2005,thirdedition,p.46)
Patents:therighttoexcludeothersfrompracticinganinventionforalimitedamountoftime,inreturnfordisclosingtheinventiontothepublic.
Productivity: theamountofoutputthatcanbeobtainedfromagivensetofinputs. TFP =totalfactorproductivity(controlsforallinputs) Laborproductivity=outputperpersonorpersonhour
April2013 IndustryCanada 2
Stylizedpictureofinnovationintheprivatesector
April2013 IndustryCanada 3
Diffusionprocess
Marketstructureandindustry;appropriabilityenvironment
Knowledgecapitalcreatedbyinnovationinvestment
R&Dandotherinnovationinvestments
Outcomes:Productivity,Profitability,
andEconomicGrowth
Firmsizeandmarketshare,diversification,andexperience
Demandpull(taste,marketsize)
PhysicalcapitalWorkerskills
Patents,otherIPR
Innovationoutput
Innovative sales
Techopportunity(sciencebase)
Focusofthispresentationontheboxesinred
Introduction Whatarethemechanismsconnectinginnovationand
patents? Innovationbasedonnovelinventionencouragedbythepatent
system(limitedmonopoly) =>patentsmayserveasindicatorsofcertainkindsof
innovation
Whatarethemechanismsconnectinginnovationandproductivity? Improvementswithinexistingfirms
Creationofnewgoods&services,leadingtoincreaseddemandforfirmsproducts
Processandorganizationalinnovationleadingtoefficiencygainsinproduction
Entryofmoreefficientfirmsandfirmsontechnologyfrontier ExitoflessefficientfirmsApril2013 IndustryCanada 4
Twoquestions
1. Whatistherelationshipbetweeninnovationandtotalfactorproductivity(TFP)?
2. Doesthepatentsystemincreaseinnovativeactivity?
This talk reviews what economists know about theanswers to these two questions.
Note: topic is broad and omissions inevitable.
April2013 IndustryCanada 5
Problem1:Measuringinnovation
LargeliteratureusingR&D(capital)asaproxyforinnovationinput Hall,Mairesse,Mohnen2010 survey,interalia
Smallerliteratureusingpatentsasaproxyforintermediateinnovationoutput
Bothmeasureshaveweaknesses,especiallyoutsidemanfacturingsector.
Nowwehavemoredirectmeasures dotheyhelp?
April2013 IndustryCanada 6
Innovationsurveyscontain..
Dataoninnovation: Productorprocessnewtofirm/market(yes/no) Shareofsalesduringpast3yearsfromnewproducts Latersurveyshaveexpendituresonvariouskindsofinnovationinvestments(answerscanbemissingornoisy)
Dataonproductivity: Oftensalesperworker(laborproductivity) SometimesTFP(adjustedforchangesincapital) Issuesarisingfromdeflationandlevelofaggregation
NexttwofiguresaddUSdatatographsproducedbyOECDinMeasuringInnovation
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WhereisCanada?Difficulttosayexactly,butprocess~17%;product~1825%
Thereisaroughrelationshipbetweenshareofinnovatingfirmsandaggregatelaborproductivity
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Problem2:MeasuringTFP
Twoapproaches: Growthaccounting usesharesgoingtolabor,capital,etc.toestimatetheirproductivity,subtractfromoutputtogetresidual
Regression outputonlabor,capital,materials,etc toobtaincoefficientestimates;computeresidual
Measurementissues: Qualityadjustmentforinput variables affectsallocationofproductivitygains
Usualdatagivessalesdeflatedbyindustryleveldeflator,butinnovativeactivitymayaffectfirmoutputquality(andpossiblymarketpower)
April2013 IndustryCanada 10
Reviewingtheevidence
FocushereonmicroevidenceusingCDMmodel(CreponDuguetMairesse1998) SomenonR&DfirmsinnovateandsomeR&Dfirmsdonotinnovate(duringa3yearperiod)
Dataisusuallycrosssectional,sosimultaneitybetweenR&D,innovation,andproductivity
Modelattemptstoaccommodatethesefeaturesofthedata
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AbriefoverviewoftheCDMmodel
Threeblocksofequations1. equationsexplainingtheR&Ddecisionandthe
amountofR&Dperformed2. Innovationoutputequations(KPF)withR&Das
input3. Productivityequation,inwhichinnovation
outputindicatorsappearasexplanatoryvariables
Estimationisrecursiveusingsingleequationblocks,orsimultaneous(nofeedback)
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WhathavewelearnedfromapplyingtheCDMmodeltoCISdata?
estimatedfor~1520countries confirmedhighratesofreturntoR&Dfoundinearlierstudies
Likepatents,innovationoutputstatisticsaremuchmorevariable(noisier)thanR&D,andR&Dtendstopredictproductivitybetter
Backupslidessummarizeresultsintables.
April2013 IndustryCanada 13
TFPoninnovativesalesshare
Robustlypositive,supportstheviewthatproductinnovationshiftsthefirmsdemandcurveout Elasticitiesrangefrom0.04to0.29withatypicalstandarderrorof0.03
Kintensiveandhitechfirmshavehigherelasticities(equalizedratesofreturn)
Coefficientofprocessinnovationdummyusuallyinsignificantornegative,suggestingmarketpower profitsmayincrease,butrevenueproductivitydoesnot(seealgebrainbackupslides)
April2013 IndustryCanada 14
TFPlevelresultswithdummies
Productdummysupportsinnovationsalesshareresult,althoughnoisier.
Processinnovation: Withproductinnovationincluded,processinnovationoftennegativeorzero
Withoutproductinnovation,processinnovationpositiveforproductivity
Substantialcorrelationbetweenproductandprocessinnovation,especiallywhentheyareinstrumented. Possiblymisleadingresultsinsomeoftheliterature
April2013 IndustryCanada 15
Aggregation
Howdoesindividualfirmrelationshipaggregateuptomacroeconomy?
Foster,Haltiwanger,andSyverson (2008)distinguishrevenueandquantityproductivity,butincludeexit&entryeffects Revenueproductivitytendstounderstatethecontributionofentrantstoproductivitygrowth(becausetheirpricesarelower)
Demandvariationisamoreimportantdeterminantoffirmsurvivalthanefficiencyinproduction(consistentwithproductivityimpacts)
April2013 IndustryCanada 16
Entryandexit Aghionetal.(2009);Gorodnichenkoetal.(2010)
Competitionandentryencouragesinnovationunlessthesectorisveryfarbehind
Djankov(2010)survey: strongerentryregulationand/orhigherentrycostsareassociatedwith
fewernewfirms,greaterexistingfirmsizeandgrowth,lowerTFP,lessinvestment,andhigherprofits
Bartelsmanetal.(2010),andsubsequentresearch: Sizeproductivitymorehighlycorrelatedwithinindustryifregulationis
efficient EvidenceonEasternEuropeanconvergence
Fullsetoflinksbetweeninnovation,competition,entry,andproductivitygrowthnotyetexplored.
April2013 IndustryCanada 17
Addingpatentstothepicture
Dopatentsprovideanincentiveforinnovativeactivity?
Simpleeconomicview: Tradeofflimitedtermrighttoexclude(monopoly)inreturnforincentivetoinnovate(andrevealtheinnovation)
Goodforinnovation Badforcompetition
ButApril2013 IndustryCanada 18
Patentsystemasviewedbyatwohandedeconomist
Effects on Positive NegativeInnovation creates an incentive
for R&D and innovation investments
impedes the combination of new ideas & inventions; raises transaction costs;inhibits cumulative invention
Competition facilitates entry of new or small firms with limited assets; enables vertical disintegration
creates short-term monopolies, which may become long-term in network industries
IndustryCanada 19April2013
Patentsmayinhibitinnovation
Thepatentthicket problemofcontractingwhenmanyinputsareessential Hightransactioncostsleadtobreakdown Negotiationsfailduetoholduppotential Discouragesentry(increasessunkcosts)
Largenumbersofpatentsinagivenarea,impossibilityofadequatesearch Expostholdupbypatentholderaftercostsaresunk Givenlitigationcosts,eveninvalidpatentscanbeenforced
Increasestheriskofinnovation
April2013 IndustryCanada 20
Patentsmayhelpcompetition
Increasedynamiccompetitionbyfacilitatingentry Usefulforsecuringfinancinginknowledgeintensiveindustries(wheretherearefewtangibleassets)
Downside searchforsalvagevaluehasledtoPAE/NPEactivityintheUS,madeprofitablebyholduppotential
Canleadtocompetitionenhancingverticaldisintegrationbyfacilitatingtradeintechnology(specialization;interfacestandardization) Chemicals Arora,Fosfuri,Gambardella Semiconductordesignfirms Hall&Ziedonis
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Whendopatentsencourageinnovation?
Theory Whenoneproduct=onepatent Whenoneproduct=manypatents? notclear Whenoneinventionbuildsonanother? notclear
Empiricalevidence Historicalinvestigationsofchangesinpatentsystems Firmsurveys Crosscountryrehgressions
April2013 IndustryCanada 22
Historicalevidence 19thcentury(variationacrossEurope/US)
Moser(2005) littleeffectonoverallinnovation,butchangeinfocus
Lerner(2001) increaseinpatentingbyforeignersbutnoincreasebyfirmswithincountryorinBritain(thatis,noincreaseininnovation)
20thcentury ParkandGinarte 60countries,196090.StrengthofIPR
(includingcoverageofpharmaceuticals)positiveforR&Dindevelopedcountries
Branstetter&Sakakibara increasingpatentscopeinJapan(1988)didnotincreaseR&D
Baldwinetal Canadianinnovationsurvey.Innovationcausespatenting,butpatentingdoesnotseemtoincreaseinnovation
April2013 IndustryCanada 23
Surveyevidence IndustrialR&DmanagersintheUS
Yalesurvey(Levin,Klevorick,Nelson,andWinter1983) CarnegieMellonsurvey(Cohen,Nelson,andWalsh1994)
EUinnovationsurveys 1993CISforNorway,Germany,Luxembourg,theNetherlands,
Belgium,Denmark,andIreland 2,849R&Dperformingfirms(reportedinArundel2001)
patentsnot themostimportantmeansofsecuringreturnstoinnovation Only~10%ofrespondentsratethemfirstorsecond Exceptions:pharmaceuticals,specialtychemicals,medicalinstruments,autoparts
April2013 IndustryCanada 24
Ausefultaxonomy discreteproductindustries
food,textiles,chemicalsincludingoilandplastics,pharmaceuticals,metals,andmetalproducts
patentsusedtoexclude,andsometimesforlicensing;alsotopreventlitigation
complexproducttechnologies machinery,computers,software,electricalequipment,electronic
components,instruments,andtransportationequipment patentsusedinnegotiations(crosslicensingandother),andto
preventlitigation Ingeneral,patentsmoreimportantforappropriabilityin
discreteproductindustries Strategicuses(crosslicensing,negotiations)greaterin
complexproductindustries
April2013 IndustryCanada 25
Summary
1. Whatistherelationshipbetweeninnovationandtotalfactorproductivity(TFP)?
Positiveforthemostpart,buttheavailableinnovationmeasuresareverynoisy,sopreciseanswersarenotpossible.
2. Doesthepatentsystemincreaseinnovativeactivity? Theroleofpatentsinencouraginginnovationisambiguous
Positiveonbalanceindiscreteproductindustries Neutralornegativeincomplexproductindustries BUTconsiderableheterogeneitywithinindustry
Patentsmayactuallyhelpcompetitioniftheyfacilitateentryorleapfrogging
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BACKUPSLIDES
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Productivity
Conventionalsetup:
q =logvalueadded(sometimesjustoutput)c =logtangiblecapitall =loglaborinputait =TFP(totalfactorproductivity)Coefficients,measuredasshares(growthaccounting)orbyregression(ashere)
April2013 IndustryCanada 28
it it it itq a c l i entity t time ,
Revenueproductivity
Iffirmshavemarketpowerandidiosyncraticprices,weobserverealrevenuer,notoutputq, with r=p+q(allinlogs)
Adddemand:qit =pit , >1),revenuefallswithincreasedoutput,althoughprofitmayrise
April2013 IndustryCanada 29
1it it it itr a c l
( )
Addinginnovation
Addtwoterms:kit intheproductionfunction,>0kit inthedemandfunction,>0
Thisyieldsthefollowingrevenuefunction:
Productimprovement(/)alwayspositiveProcessimprovement((+1)/)canbenegative
April2013 IndustryCanada 30
1 1it it it it itr a c l k
( )
SomepapersestimatingtheCDMmodelandvariants
Crepon,Duguet,Mairesse1998 Duguet2006 Loofetal2001 Janzetal2003 LoofandHeshmati2003 CriscuoloandHaskel2003 HuergoandJaumandreu2004 Benavente2006
Jefferson,Baietal2006 LoofandHeshmati2006 VanLeeuwenandKlomp2006 Parisietal2006 Griffithetal2006 Mairesseetal2009 Polderetal2009 MairesseandRobin2010 Halletal2011
April2013 IndustryCanada 31
Levelvsgrowth
CDMisintermsofproductivitylevelsprimarilyfordataavailabilityreasons
Itseemsmorenaturaltothinkofinnovativeactivityasaffectingproductivitygrowth
Someworkalongtheselines,butmatchingacrosssurveysusuallyleavesaveryselectedsample,possiblynotrepresentative
April2013 IndustryCanada 32
ProductivityinnovationrelationshipinTFPlevels
April2013 IndustryCanada 33
Sample TimeperiodElasticitywithrespecttoinnovsalesshare
Processinnovationdummy
Chileanmfgsector 19951998 0.18(0.11)*ChineseR&Ddoingmfgsector 19951999 0.035(0.002)***Dutchmfgsector 19941996 0.13(0.03)*** 1.3(0.5)***Finnishmfgsector 19941996 0.09(0.06) 0.03(0.06)Frenchmfgsector 19861990 0.07(0.02)***FrenchHitechmfg# 19982000 0.23(0.15)* 0.06(0.02)***FrenchLowtechmfg# 19982000 0.05(0.02)*** 0.10(0.04)***GermanKintensivemfgsector 19982000 0.27(0.10)*** 0.14(0.07)**Irishfirms# 20042008 0.11(0.02)*** 0.33(0.08)***Norwegianmfgsector 19951997 0.26(0.06)*** 0.01(0.04)SwedishKintensivemfgsector 19982000 0.29(0.08)*** 0.03(0.12)Swedishmfgsector 19941996 0.15(0.04)*** 0.15(0.04)***Swedishmfgsector 19961998 0.12(0.04)*** 0.07(0.03)***Swedishservicesector 19961998 0.09(0.05)* 0.07(0.05)
Source:author's summaryfromAppendixTable1.#Innovativesales shareandprocess innovationincludedseparatelyintheproductionfunction.
ProductivityinnovationrelationshipinTFPlevels
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Sample Timeperiod Productinnovationdummy
Processinnovationdummy
Argentinianmfgsector 19982000 0.22(0.15)Brazilianmfgsector 19982000 0.22(0.04***Estonianmfgsector 19982000 0.17(0.08)** 0.03(0.09)Estonianmfgsector 20022004 0.03(0.04) 0.18(0.05)***Frenchmfgsector 19982000 0.08(0.03)**Frenchmfgsector 19982000 0.06(0.02)*** 0.07(0.03)**Frenchmfgsector 19982000 0.05(0.09) 0.41(0.12)***Frenchmfgsector 20022004 0.08(0.13) 0.45(0.16)***Frenchservicesector 20022004 0.27(0.52) 0.27(0.45)Germanmfgsector 19982000 0.05(0.03) 0.02(0.05)Irishfirms# 20042008 0.45(0.08)*** 0.33(0.08)***Italianmfgsector 19952003 0.69(0.15)*** 0.43(0.13)***ItalianmfgsectorSMEs 19952003 0.60(0.09)*** 0.19(0.27)Mexicanmfgsector 19982000 0.31(0.09)**Spanishmfgsector 20022004 0.16(0.05)***Spanishmfgsector 19982000 0.18(0.03)*** 0.04(0.04)Swissmfgsector 19982000 0.06(0.02)***UKmfgsector 19982000 0.06(0.02)*** 0.03(0.04)
ProductivityinnovationrelationshipinTFPgrowthrates
April2013 IndustryCanada 35
Sample Timeperiod ElasticitywrtInnovsalesshare
Productinnovationdummy
Processinnovationdummy
Argentinianmfgsector 19922001 0.09(0.08) 0.18(0.08)**Dutchmfgsector 19941998 0.009(0.001)*** 1.2(0.7)*Dutchmfgsector 19961998 0.0002***#Frenchmfgsector 19861990 0.022(0.004)***Germanmfgsector 20002003 0.04(0.02)** 0.14(0.08)*@Italianmfgsector 19921997 0.12(0.09) 0.04(0.12)Spanishmfgsector 19901998 0.015(0.004)***Swedishmfgsector 19961998 0.07(0.03)**Swedishservicesector 19961998 0.08(0.03)***UKmfgsector 19941996 0.02(0.02) 0.02(0.01)*UKmfgsector 19982000 0.07(0.03)** 0.04(0.02)**
#elasticitywithrespecttoinnovationexpenditurepersales.@elasticitywithrespecttocostreductionperemployee.
Source:author's summaryfromAppendixTable1.