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

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

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!

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

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

Results of Estimation VariablePRODUCTIVITY GROWTHLEVEL InnovationNegative – SignificantPositive – Significant Group MemberPositive – Significant New FirmPositive – Non Signif. Turnover Export SharePositive – Non Signif. Observations1836 Stronger for Manufacturing than Services

Results: Size Effects Innovation - Size Interaction 1 st Quartile – 21 Empl. ZeroUp to 250 Employees nd Quartile – 41 Empl. Zero250 – 500 Employees rd Quartile – 180 Empl – 750 Employees th Quartile Over 750 Employees Larger and very small firms behave differently

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

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

Autoparts Companies According to Revenues

Engineering hours in Auto Components MAX: 4240 MAX: 1840 Years:

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

Product Complexity and Development Number of Unique Parts Development Time Size of Team for Development Engineering Hours Development Cost Jobmaster RollerbladesMicrofilm DeskJet Mid-Size Screwdriver Case Printer Car 3 1 year 2 people 1800 h $150, year 3 people 8500 h $750, year 10 people h $1.5 million year 65 people h $50 million 10, year 500 people 2.5 million h $1 billion

Company Size and Development Effort National firms

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…