Productivity and Innovation: Current Findings and Future Challenges

1. Productivity and Innovation:Current Findings and Future Challenges Fundação Luso-Americana para o Desenvolvimento Lisboa, 26 de Junho, 2002 FRANCISCO VELOSO1,2 PEDRO CONCEIÇÃO3,4 1Faculdade de Ciências Económicas e Empresariais Universidade Católica Portuguesa 2Department of Engineering and Public Policy Carnegie Mellon University 3Center for Innovation, Technology and Policy Research Instituto Superior Técnico 4 United Nations Development Programme

2. General Findings on Productivity • Wide dispersion in productivity levels across firms • Across firms in the same sector • Sharing similar type of producing technologies • Selling the same type of goods and services • This wide dispersion across firms is persistent over time • Entry and exit is are important sources of aggregate productivity growth • Productivity increases are not associated with employment reductions at the firm level • Productivity Growth does not depend only on high tech • Drivers are low tech as well as high tech areas • What matters is innovative applications of technology

3. Determinants of Productivity: What we know • Firms entering a sector exhibit lower levels, but higher growth rates of productivity than existing firms • Average level of human capital of the firm positively associated with productivity levels and growth rates • Process may be mediated by technology (or innovation) • Increasing international exposure (measured by exports) associated with higher productivity levels and growth rates • Management and ownership structure influences productivity • Although not much has been widely accepted as a determinant • Innovation is a key correlate of productivity – so far positive… • Although they are probably jointly determined • Limited understanding of this relationship!

4. Empirically Observable Predictions On the short run: • Expect innovation to be negatively associated with productivity growth • Not the other way around, as widely expected In the long-run: • Should observe a positive relationship between levels of innovation and levels of productivity

5. Novelties in our approach • Look at innovation in general, not only at the adoption of a specific technological innovation (such as computers) • Use information on firms that have attempted to innovate and on firms that have introduced innovations • Consider all innovations, not only at radical innovations that have merited a patent (or at least an application for a patent). • Relevant for countries such as Portugal • Behind countries that lead the technological frontier • Consider firms in both manufacturing and services

6. Results of Estimation Stronger for Manufacturing than Services

7. Results: Size Effects Larger and very small firms behave differently

8. Conclusions • Prior: • Positive correlation between innovation and productivity growth • Expected from standard thinking: innovation good for productivity • Our Results • Firms that have introduced innovations in the last couple of years growth less in labor productivity than those that did not innovate • Evidence for different model specifications • Valid for manufacturing, but not as much for services • Results confirm the hypothesis: investments in innovation are unproductive in the short run • Test on long run effects points to the short run characteristics of the observed phenomenon: • Firms that have introduced innovations in the last couple of years have higher levels of labor productivity

9. Some Potential Policy Implications • Firms ( that are myopic or lacking resources or facing competitive pressures that do not reward innovation) may feel the short-term loss in productivity as a powerful disincentive to invest in innovation • If extreme, this situation can produce a “lock-in” of low innovation and low productivity growth (Portugal is certainly a case where such effects could be observed) • If the reason is the “institutional/incentives context”, then increasing the producitivity rate of growth can be understood as a problem of collective action

10. Autoparts Companies According to Revenues

11. Engineering hours in Auto Components MAX: 4240 MAX: 1840 Years: 1997-2000

12. Investment in Development: Autoparts Firms Average level of expenditures of top World Firms Percent of Sales

13. Product Complexity and Development Jobmaster Rollerblades Microfilm DeskJet Mid-Size Screwdriver Case Printer Car • 3 • 1 year • 2 people • 1800 h • $150,000 • 35 • 2 year • 3 people • 8500 h • $750,000 • 35 • 1 year • 10 people • 14000 h • $1.5 million • 200 • 1.5 year • 65 people • 140000 h • $50 million • 10,000 • 3.5 year • 500 people • 2.5 million h • $1 billion Number of Unique Parts Development Time Size of Team for Development Engineering Hours Development Cost

14. Company Size and Development Effort National firms

15. An Idea... • Key Questions: • Do we know the specific obstacles that individual sectors face to improve productivity? • Do we know the success cases? • e.g. is quality certification improving productivity in shoe industry? • e.g. is the adoption of IT having a major impact in banking? • An Idea: • Similar to Sloan Centers in Top US Schools • The Objective: • Know the right questions to be answered…