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 October 2006

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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: , and  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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 12 OECD productivity workshop Histogram – Labour productivity (5196 obs.) 080,000160,000240,000320,000400,000480, in CHF Mean:136,000 CHF Median:120,500 CHF Mode:104,000 CHF

Jan-Egbert Sturm / Konjunkturforschungsstelle Swiss Institute for Business Cycle Research 13 OECD productivity workshop Histogram – Labour productivity growth (1226 obs.) -100%-50%0%50%100% Mean:5.6% (over 3 years) Median:4.4% (over 3 years)

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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)

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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 Innovation activity Product innovation Process innovation R&D activities Patent applications New products

Jan-Egbert Sturm / 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)

Jan-Egbert Sturm / 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% < ≥1000

Jan-Egbert Sturm / 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 *** 0.03*** Obs. adj. R2 3, ,785 3,7553,

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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* * Obs. 2,6393,7852,708 2,7042,680

Jan-Egbert Sturm / 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 ***0.21***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** ** ** Obs. adj. R

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

Jan-Egbert Sturm / 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

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 October 2006