Konjunkturforschungsstelle Swiss Institute for Business Cycle Research Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level

KonjunkturforschungsstelleSwiss Institute for Business Cycle

Research

Innovation and Labour Productivity in Switzerland:

An Analysis Based on Firm Level Data

Jan-Egbert Sturm

OECD Workshop on Productivity Analysis and Measurement16-18 October 2006

Jan-Egbert Sturm / [email protected]


Research

2OECD productivity workshop

1. Business cycle developments in Switzerland Business tendency surveys Business cycle research

2. Switzerland in a globalized world economy Internationalization Financial sector

3. Switzerland’s long-term growth perspectives Innovation economics Public policy

KOF’s core research areas



Research


Outline of the presentation

Introduction / research question

Literature overview

Model specification

Data

Empirical results

Concluding remarks



Research


Introduction

Research question To what extent do different types

of firm-level innovations affect labour productivity of firms in Switzerland?

Innovative aspects of this study Several innovation indicators Panel data Dynamics over time Switzerland



Research


Two distinct approaches to assess contribution of innovations to economic performance case studies econometric analysis

- Production function approach

- Cost function approach

Relationship innovations and productivity can be analyzed on different levels Economy, sector, industry, firm

Literature overview



Research


Literature overview

Reference studies are characterized by the fact that they Concentrate on productivity at the firm level Use micro data from Community Innovation Surveys (CIS)

Examples Crépon et al. (1998)

- three-equation model (R&D ! innovation ! productivity); cross-section of French firm data

Lööf et al. (2001); Janz et al. (2003); Griffith et al. (2005)- comparative studies for several European countries

using the framework of analysis developed by Crépon et al. (1998)

Lööf/Heshmati (2006); Van Leeuwen/Klomp (2006)- sensitivity analysis of innovation/economic performance models

with respect to several parameters



Research


Model specification

Standard Cobb-Douglas production function:

where- L is labour

- H is human capital

- C is physical capital

- I are innovation activities

- t is the time identifier, i is the firm identifier

- j is the branch identifier



Research


Model specification

Reformulate the standard Cobb-Douglas production function to: Equation explaining the level of (log) labour productivity

Equation explaining growth in labour productivity



Research


Data

Firm level data is almost completely lacking in Switzerland

Data from KOF – Swiss Innovation Surveys Surveys used: 1996, 1999 and 2002

covering: 1994-96, 1997-99 and 2000-02 Questionnaire similar to the Community Innovation Surveys

Response rates (30-40%); do not vary much among branches and size classes Exceptions: over-representation of machinery,

under-representation of clothing/leather and wood processing

Extreme observations are removed before analysis



Research


Model specification & data

Dependent variable: (log of) value added per employee growth of value added per employee



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Histogram – Labour productivity (5196 obs.)

0 80,000 160,000 240,000 320,000 400,000 480,0000.000000

0.000002

0.000004

0.000006

0.000008

0.000010

in CHF

Mean: 136,000 CHFMedian: 120,500 CHFMode: 104,000 CHF



Research


Histogram –Labour productivity growth (1226 obs.)

-100% -50% 0% 50% 100%0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Mean: 5.6% (over 3 years)

Median: 4.4% (over 3 years)



Research



Dependent variable: (log of) value added per employee growth of value added per employee

Explanatory variables: share of employees with tertiary-level education capital / labour ratio

- dummies for the number of competitors

- dummies for firm size, branch affiliation and time

- dummy for foreign-owned firms



Research



Innovation variables Innovation activity (yes/no)

- product innovation (yes/no)

- process innovation (yes/no) R&D activities

(yes/no) patent applications (yes/no) new products for the (world) market (yes/no)



Research


Correlationmatrix

Obs.\Corr. Inno

vatio

n ac

tivity

Pro

duct

inno

vatio

n

Pro

cess

inno

vatio

n

R&

D a

ctiv

ities

Pat

ent a

pplic

atio

ns

New

pro

duct

s

Labour productivity

Innovation activityProduct innovationProcess innovationR&D activitiesPatent applicationsNew products

0.08 0.09 0.07 0.11 0.10 0.10

0.80 0.72 0.70 0.30 0.370.49 0.68 0.35 0.41

0.53 0.23 0.290.40 0.41

0.39

5192

5192 5196

5192 5196 5196

5149 5153 5153 5153

5104 5108 5108 5075 5108

4863 4863 4863 4824 4786 4863



Research


Correlationmatrix

Obs.\Corr. Inno

vatio

n ac

tivity

Pro

duct

inno

vatio

n

Pro

cess

inno

vatio

n

R&

D a

ctiv

ities

Pat

ent a

pplic

atio

ns

New

pro

duct

s

Labour prod. growth -0.02 -0.03 -0.05 -0.01 0.02 -0.03

Innovation activityProduct innovationProcess innovationR&D activitiesPatent applications

0.77 0.72 0.69 0.32 0.340.45 0.67 0.37 0.39

0.52 0.26 0.280.43 0.39

0.40New products

1224

1224 1224

1224 1224 1224

1209 1209 1209 1209

1204 1204 1204 1194 1204

1191 1191 1191 1176 1172 1191



Research


Effect of firm size on labour productivity

L0%

5%

10%

15%

20%

25%

<20 20-50 50-100 100-200 200-500 500-1000 ≥1000



Research


Results: level equation, OLS

(1) (2) (3) (4) (5) (6) (7)

Dummy foreign firms 0.10 *** 0.10 *** 0.10 *** 0.10 *** 0.10 *** 0.11 *** 0.10 ***Share tertiary educationCapital/labour ratio

0.07 ***0.27 ***

0.07 *** 0.07 *** 0.07 *** 0.07 *** 0.07 *** 0.07 ***0.27 *** 0.27 *** 0.27 *** 0.26 *** 0.26 *** 0.26 ***


0.000.00

0.010.01

0.05 ***0.03 ***

Obs.adj. R2

3,6940.50

3,785 3,785 3,785 3,785 3,755 3,7170.500.500.500.500.500.50



Research


Results: level equation, 2SLS

Causality / endogeneity problems

List of instruments Intensity of price competition Intensity of non-price competition Technological potential outside firm Shortage of R&D personnel Shortage of skilled labour Expected future demand



Research


Results: level equation, 2SLS

(1) (2) (3) (4) (5) (6) (7)

Dummy foreign firms 0.10 *** 0.10 *** 0.09 *** 0.09 *** 0.09 *** 0.09 *** 0.09 ***Share tertiary education 0.07 ***Capital/labour ratio 0.27 ***

0.08 *** 0.08 *** 0.08 *** 0.08 *** 0.08 *** 0.08 ***0.27 *** 0.27 *** 0.27 *** 0.27 *** 0.27 *** 0.28 ***


0.20 **0.16 *

0.080.13 *

0.080.01

Obs. 2,6393,785 2,708 2,708 2,708 2,704 2,680



Research


Results: growth equation

(1) (2) (3) (4) (5) (6) (7)

Dummy foreign firms 0.06 ** 0.06 ** 0.06 ** 0.06 ** 0.06 ** 0.05 ** 0.06 **Initial labour productivity -0.20 *** -0.20 *** -0.20 *** -0.20 *** -0.20 *** -0.21 *** -0.21 ***Share tertiary educationCapital/labour ratio

0.02 0.02 0.02 0.02 0.02 0.02 0.020.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 ***


0.04 **0.03

0.010.04 **

0.030.05 **

Obs.adj. R2

7750.32

7930.32

7930.32

7930.32

7930.32 0.32

7840.32779



Research


Concluding remarks

Larger firms have higher levels of labour productivity

Labour productivity levels of foreign-owned firms

lie 10% above that of domestic-owned firms

Foreign-owned firms grow twice as fast as domestic-owned firms



Research


Concluding remarks

Innovation activities matter for both the level of and the growth in labour productivity

The introduction of new products subsequently increases labour productivity by 5%-points over the next three years

However, process innovations do not play a significant role in explaining the level of or the growth in labour productivity



Research


Future research

Problem of double counting Produces a downward bias on innovation coefficients

Use of nominal values Price deflators not available at firm level

Innovations are to some extent public goods Spillovers might be important


Research

Innovation and Labour Productivity in Switzerland:

An Analysis Based on Firm Level Data

Jan-Egbert Sturm

OECD Workshop on Productivity Analysis and Measurement16-18 October 2006

Documents

Konjunkturforschungsstelle Swiss Institute for Business Cycle Research Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level