1. INNOVATION AND PRODUCTIVITY: A Firm Level Study of Ukrainian Manufacturing Sector Tetyana Pavlenko and Ganna Vakhitova Kyiv School of Economics Kyiv Economic Institute International conference on innovation, competitiveness and growth Zargeb, November 27, 2008

2. Motivation Innovation as a major growth factor Ukraine, 2000-2008 – cheap production inputs and high demand on export, not any longer! Alternative – technological changes (Romer, 1986; Griliches and Lichtenberg, 1984; Aghion and Howitt, 1998; Zachariadis, 2003) Additionally – innovation spillovers to private and public sectors ((Griliches, 1992; Griffith, 2000; Bernstein and Nadiri, 1991) Innovations in Ukraine government R&D expenditures < 60% of the EU25 average business R&D expenditure - only 31% of the EU25 average

3. Motivation Our goal Study the impact of innovation on productivity in Ukraine: –probability of innovative activities and intensity of innovation expenditures; –innovative efforts & innovation output; –innovations & labor productivity Test “success breeds success” hypothesis

4. Literature review Cohen and Klepper (1996) summarize earlier findings –Larger firms are more likely to invest in R&D –R&D intensity does not vary with the firm’s size –Innovation input positively related to innovation output –Innovation output positively impacts firm's productivity Griliches (1995) – impact of R&D on firm’s productivity and profitability within a Cobb- Douglas production function framework. Pakes and Griliches (1984): importance of “the knowledge production function”. Crépon, Duguet and Mairesse (1998) a four-equation model (CDM model): –selectivity equation, –innovation input (R&D), –innovation output, –and firm’s productivity equations. Griffith et al. (2006) modified CDM model: all firms, dummy variables for product and process innovations

5. Literature review Empirical studies Developed European countries, CDM model, CIS surveys: –Lööf and Heshmati (2003) for Norway, Finland and Sweden, –Lööf and Heshmati (2002, 2006) for Sweden, –Janz et al. (2003) for Germany and Sweden, –Griffith et al. (2006) for France, Germany, Spain and UK. –In all abovementioned countries – positive relationship between innovation input and innovation output as well as between innovation output and firm’s productivity (exceptions: Finland and Germany) –Product innovations – 6% in France, UK, 17.6% in Spain –Process innovations – 7% in France only.

6. Literature review Empirical studies Developing countries: –Benavente, 2006 for Chile –Chudnovsky et al., 2004 for Argentine –Raffo, 2007 for Latin-American countries Similar results: –Larger firms are more likely to invest in R&D –R&D intensity does not vary with the firm’s size –R&D increases with market share Different results (explained by substantial lags): –Innovation input has no impact on innovative sales –Innovative sales do not affect productivity

7. Literature review Empirical studies Transition countries: –Masso and Vahter, 2006 for Estonia (CDM model, CIS4, followed Griffith et al., 2006) –Roud, 2007 for Russia (similar to Janz et al., 2003) –Damijan, 2005 for Slovenia (panel data, followed Crepon et al., 1998) Findings of those studies overall are in line with those for developed European countries. Coefficients are larger. in the case of Estonia only process innovations are significant (12-22%) in case of Russia only product innovations positively contribute to productivity.

8. Literature review “Success breads success”: technological opportunities “Innovations improve technological opportunities and thus stimulate future innovations” Mansfield, 1958, Stoneman, 1983; Nelson, 1988 internal funding “Innovation increases sales, thus providing internal funds for further innovations” Nelson and Winter, 1982

9. Methodology Griffith et al., 2006 Our modifications: (1) Dummy for last year innovation success (2) Last year productivity – dynamics (2) Dummy for last year innovation expenditures (3) Dummy for last year innovation success

10. Data 2006-2004 Manufacturing firms (NACE 10-41) Statistical reports collected by the State Statistics Committee of Ukraine (Derzhkomstat) Random draw of 2000 firms from the list of firms which operated in 2004-2006 and reported NACE10-41 in either year Excluded 556 firms that switched sector in either year Excluded 652 observations with missing values, zero sales or zero employment Sample size – 792 firms Innovative firms – at least one product or process innovation in a considered year, 14.4%

11. Descriptive statistics, 2006 Sales in 1000s UAH66 412.73 Sales per employee in 1000s UAH149.51 Sales from innovative products0.0330 R&D investment0.0109 Physical capital investment0.0980 Employment331 R&D employment0.0040 University educated0.1843

12. Descriptive statistics, 2006 Innovative firms0.1437 Continuous innovators0.0958 Product innovators0.0983 Process innovators0.0630 Product & Process innovators0.0365 Own R&D0.0567 Continuous own R&D during 2004-20060.0378 Purchased new equipment0.1046 Purchased new technologies0.0239 Government funding during 2004-20060.0113

13. Descriptive statistics Most important market: - market within Ukraine0.9319 - CIS countries0.0201 - other international market0.0479 Newly established during 2004-20060.0264 Downsized during 2004-20060.0378

14. Empirical results Variablesselectioninnovation input Firm size 0.552 *** -0.247 Human capital 0.19 3.579 * Government funding 2.400 *** 2.328 *** Newly established 0.853 ** 1.018 Downzised-0.556 3.831 *** Markets of CIS countries-0.253 1.382 * Markets of other countries-0.289-0.145 Market concentration-2.001-1.91 Previous success 1.812 *** - Innovation_expenditure_2005- 1.129 ** Process innovation- 0.833 ** Productivity_2005- 0.451 ** Inverse Mills’ ratio- 0.0727

15. Empirical results VariablesProduct innovations Process innovation Productivity Firm size 0.3257*** 0.7527*** 0.0715** Previous success 1.7243*** 0.2889- Government support-0.4736-0.7395- Newly established 0.7242-0.0969-0.2072 Downzised-2.3126***-4.0945***-0.3352** CIS countries-0.8108*-1.4514***-0.0521 Other countries 0.1187 0.2395-0.3701*** Market concentration-3.2432-9.3383- Physical capital investment--0.0759 0.2251*** Human capital-- 1.6477*** Predicted innovation input 0.2562*** 0.9141***- Predicted product innovation---0.2053 Predicted process innovation-- 1.1369***

16. Conclusions Four sets of results: factors determining firm’s choice to invest resources in innovation activities; determinants of intensity of innovation expenditures.; contribution of innovation output to labor productivity; test for the “success breeds success” hypothesis.

17. Conclusions Success indeed breeds success: –firms with positive experience in producing innovation are more likely to spend more on innovation; –firms that were successful in introducing product innovations in the previous periods are more likely to become product innovator in the current period. Process innovation is a contributor to productivity Evidence of two-way relationship between innovation input and productivity State support matters on earlier stages (only?)