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Konjunkturforschungsstelle Swiss 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 Measurement 16-18 October 2006
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 2 OECD 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 3 OECD productivity workshop Outline of the presentation Introduction / research question Literature overview Model specification Data Empirical results Concluding remarks
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 4 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 5 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 6 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 7 OECD productivity workshop Literature overview Wieser (2005) provides a meta-analysis on R&D Overall average private rate of return: 28% No variation across time, countries and industries Overall mean elasticity: 0.13 Significant country and time effects, as well as industry effects -Lower for Japan and Europe -Higher in the 1980s compared with the 1970s -Lower in machinery and motor vehicles
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 8 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 9 OECD productivity workshop Model specification Reformulate the standard Cobb-Douglas production function to: Equation explaining the level of (log) labour productivity Equation explaining growth in labour productivity
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 10 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 11 OECD productivity workshop Model specification & data Dependent variable: (log of) value added per employee growth of value added per employee
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 12 OECD productivity workshop Histogram – Labour productivity (5196 obs.) 080,000160,000240,000320,000400,000480,000 0.000000 0.000002 0.000004 0.000006 0.000008 0.000010 in CHF Mean:136,000 CHF Median:120,500 CHF Mode:104,000 CHF
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 13 OECD productivity workshop 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)
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 14 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 15 OECD productivity workshop 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)
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 16 OECD productivity workshop Correlation matrix Obs.\Corr. Innovation activityProduct innovation Process innovationR&D activities Patent applications New products Labour productivity Innovation activity Product innovation Process innovation R&D activities Patent applications New products 0.080.090.070.110.10 0.800.720.700.300.37 0.490.680.350.41 0.530.230.29 0.400.41 0.39 5192 5196 51925196 51495153 51045108 50755108 4863 482447864863
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 17 OECD productivity workshop Correlation matrix Obs.\Corr. Innovation activityProduct innovation Process innovationR&D activities Patent applications New products Labour prod. growth-0.02-0.03-0.05-0.010.02-0.03 Innovation activity Product innovation Process innovation R&D activities Patent applications 0.770.720.690.320.34 0.450.670.370.39 0.520.260.28 0.430.39 0.40 New products 1224 1209 1204 11941204 1191 117611721191
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 18 OECD productivity workshop Estimation method Level equation: Ordinary Least Squares Two-Stage Least Squares (2SLS) (2SLS with Random Effects) Growth equation: Ordinary Least Squares (Random Effects model)
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 19 OECD productivity workshop Effect of firm size on labour productivity L 0% 5% 10% 15% 20% 25% <2020-5050-100100-200200-500500-1000≥1000
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 20 OECD productivity workshop Results: level equation, OLS (1)(2)(3)(4)(5)(6)(7) Dummy foreign firms0.10***0.10***0.10***0.10***0.10***0.11***0.10*** Share tertiary education Capital/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*** Innovation activity Product innovation Process innovation R&D activities Patent applications New products 0.00 0.01 0.05*** 0.03*** Obs. adj. R2 3,694 0.50 3,785 3,7553,717 0.50
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 21 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 22 OECD productivity workshop Results: level equation, 2SLS (1)(2)(3)(4)(5)(6)(7) Dummy foreign firms0.10***0.10***0.09***0.09***0.09***0.09***0.09*** Share tertiary education0.07*** Capital/labour ratio0.27*** 0.08***0.08***0.08***0.08***0.08***0.08*** 0.27***0.27***0.27***0.27***0.27***0.28*** Innovation activity Product innovation Process innovation R&D activities Patent applications New products 0.20** 0.16* 0.08 0.13* 0.08 0.01 Obs. 2,6393,7852,708 2,7042,680
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 23 OECD productivity workshop Results: growth equation (1)(2)(3)(4)(5)(6)(7) Dummy foreign firms0.06**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 education Capital/labour ratio 0.02 0.21***0.21***0.21***0.21***0.21***0.21***0.21*** Innovation activity Product innovation Process innovation R&D activities Patent applications New products 0.04** 0.03 0.01 0.04** 0.03 0.05** Obs. adj. R2 775 0.32 793 0.32 793 0.32 793 0.32 793 0.32 784 0.32 779
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 24 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 25 OECD productivity workshop 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
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Jan-Egbert Sturm / kof@kof.ethz.ch Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 26 OECD productivity workshop 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
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Konjunkturforschungsstelle Swiss 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 Measurement 16-18 October 2006
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