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Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level Data

Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level Data. Jan-Egbert Sturm OECD Workshop on Productivity Analysis and Measurement 16-18 October 2006. KOF’s core research areas. Business cycle developments in Switzerland Business tendency surveys

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Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level Data

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  1. Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level Data Jan-Egbert Sturm OECD Workshop on Productivity Analysis and Measurement 16-18 October 2006

  2. KOF’s core research areas • Business cycle developments in Switzerland • Business tendency surveys • Business cycle research • Switzerland in a globalized world economy • Internationalization • Financial sector • Switzerland’s long-term growth perspectives • Innovation economics • Public policy

  3. Outline of the presentation • Introduction / research question • Literature overview • Model specification • Data • Empirical results • Concluding remarks

  4. 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

  5. Literature overview • 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

  6. 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

  7. 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

  8. Model specification • Reformulate the standard Cobb-Douglas production function to: • Equation explaining the level of (log) labour productivity • Equation explaining growth in labour productivity

  9. Data • Firm level data is almost completely lacking in Switzerland • Data from KOF – Swiss Innovation Surveys • Surveys used: 1996, 1999 and 2002covering: 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

  10. Model specification & data • Dependent variable: • (log of) value added per employee • growth of value added per employee

  11. Histogram – Labour productivity (5196 obs.) 0.000010 Mean: 136,000 CHF Median: 120,500 CHF Mode: 104,000 CHF 0.000008 0.000006 0.000004 0.000002 0.000000 0 80,000 160,000 240,000 320,000 400,000 480,000 in CHF

  12. Histogram –Labour productivity growth (1226 obs.) 2.00 Mean: 5.6% (over 3 years) Median: 4.4% (over 3 years) 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 -100% -50% 0% 50% 100%

  13. Model specification & data • 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

  14. Model specification & data • 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)

  15. 0.08 0.09 0.07 0.11 0.10 0.10 0.80 0.72 0.70 0.30 0.37 5192 0.49 0.68 0.35 0.41 5192 5196 0.53 0.23 0.29 5192 5196 5196 0.40 0.41 5149 5153 5153 5153 0.39 5104 5108 5108 5075 5108 4863 4863 4863 4824 4786 4863 Correlationmatrix Process innovation Patent applications Product innovation Innovation activity R&D activities New products Obs.\Corr. Labour productivity Innovation activity Product innovation Process innovation R&D activities Patent applications New products

  16. -0.02 -0.03 -0.05 -0.01 0.02 -0.03 0.77 0.72 0.69 0.32 0.34 1224 0.45 0.67 0.37 0.39 1224 1224 0.52 0.26 0.28 1224 1224 1224 0.43 0.39 1209 1209 1209 1209 0.40 1204 1204 1204 1194 1204 1191 1191 1191 1176 1172 1191 Correlationmatrix Process innovation Patent applications Product innovation Innovation activity R&D activities New products Obs.\Corr. Labour prod. growth Innovation activity Product innovation Process innovation R&D activities Patent applications New products

  17. Effect of firm size on labour productivity 25% 20% 15% 10% 5% L 0% <20 20-50 50-100 100-200 200-500 500-1000 ≥1000

  18. 0.10 *** 0.10 *** 0.10 *** 0.10 *** 0.10 *** 0.11 *** 0.10 *** 0.07 *** 0.07 *** 0.07 *** 0.07 *** 0.07 *** 0.07 *** 0.07 *** 0.27 *** 0.27 *** 0.27 *** 0.27 *** 0.26 *** 0.26 *** 0.26 *** 0.00 0.00 0.01 0.01 0.05 *** 0.03 *** Results: level equation, OLS (1) (2) (3) (4) (5) (6) (7) Dummy foreign firms Share tertiary education Capital/labour ratio Innovation activity Product innovation Process innovation R&D activities Patent applications New products 3,785 3,785 3,785 3,785 3,755 3,717 3,694 Obs. 0.50 0.50 0.50 0.50 0.50 0.50 0.50 adj. R2

  19. 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

  20. 0.10 *** 0.09 *** 0.09 *** 0.09 *** 0.09 *** 0.09 *** 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 * 0.08 0.13 * 0.08 0.01 Results: level equation, 2SLS (1) (2) (3) (4) (5) (6) (7) Dummy foreign firms 0.10 *** Share tertiary education 0.07 *** Capital/labour ratio 0.27 *** Innovation activity Product innovation Process innovation R&D activities Patent applications New products 3,785 2,708 2,708 2,708 2,704 2,680 2,639 Obs.

  21. 0.06 ** 0.06 ** 0.06 ** 0.06 ** 0.06 ** 0.05 ** 0.06 ** -0.20 *** -0.20 *** -0.20 *** -0.20 *** -0.20 *** -0.21 *** -0.21 *** 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.04 ** 0.03 0.01 0.04 ** 0.03 0.05 ** Results: growth equation (1) (2) (3) (4) (5) (6) (7) Dummy foreign firms Initial labour productivity Share tertiary education Capital/labour ratio Innovation activity Product innovation Process innovation R&D activities Patent applications New products 793 793 793 793 784 779 775 Obs. 0.32 0.32 0.32 0.32 0.32 0.32 0.32 adj. R2

  22. 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

  23. 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

  24. 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

  25. Innovation and Labour Productivity in Switzerland: An Analysis Based on Firm Level Data Jan-Egbert Sturm OECD Workshop on Productivity Analysis and Measurement 16-18 October 2006

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