Innovation, Productivity and Skills

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Innovation, Productivity and Skills

• Geoff Mason, Brigid OLeary,
• Michela Vecchi

2
Productivity and Growth

• Comparing productivity and output growth across
  countries to understand determinants of
  performance over time
• Potentially important role for skilled workforce
• Interactions between human capital and technology
  play an important part in the theoretical and
  empirical analysis (Benhabib and Spiegel 1994)

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Simple Production Function

• Output production depends on
• Physical capital (K)
• Human capital hours worked (L)
• Skills/Education (H)
• Residual term (TFP) captures unobservable
  technology and complementarities between
  technology and skills

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Innovation, Skills Productivity

• Two faces of RD (Cohen and Levinthal, 1989
  Griffiths et al 2004)
• 1. Private Investment
• Combined investment in skills and RD produce
  additional productivity gains
• 2. Spillovers and absorptive capacity
• Benefits of knowledge production available to
  other firms/ industries/countries
• Absorptive capacity - ability to make use of RD
  (both internally and from spillovers)

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Aims of our research

• Aim to identify underlying role for innovation
  and skills which has traditionally been lost
  in TFP residual
• Contributing to research on RD and innovation
  using a new industry level data set
• Attempting to better capture the role of
  absorptive capacity and spillovers in the
  innovation process

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Measuring Innovation

• Traditional role for RD investment as an
  additional RHS variable on the production
  function
• Patent data a superior alternative because an
  innovation output measure and indicator of
  successful advancements in knowledge
• Using both variables we can separate the input
  phase (which creates knowledge) from the output
  phase (the effect that new knowledge has on
  productivity) (Griliches 1990)

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An Innovation in Innovation Data

• Additional use of patent dataset
• Citation data Existing patents cited in the
  application for a new patent are an indication of
  firms absorptive capacity (Mancusi 2004)
• Patents registered by other countries represent
  spillover potential (Mancusi 2004, Shanks and
  Zheng 2006)

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Data Sources

• Country and Industry Data EPKE 5-country
  26-industry 21-year dataset (constructed by NIESR
  and Groningen)
• RD Investment, Gross output and Deflators (OECD
  STAN and ANBERD)
• Patent and Citation Data (derived from EPO and
  provided by CESPRI, Bocconi University, Milan)
• Foreign Patent Data US Patent Office (at
  Industry level from Eurostat)

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Average RD Intensity
10
Average Patent Applications
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Relationships between RD, Innovation and Labour
Productivity
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Or not
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Estimating Relationships between RD, Knowledge
and Productivity

• First look at determinants of RD investment then
  knowledge production and finally estimate an
  output production function
• Estimating System of Simultaneous Equations
  Address problems of reverse causality through
  simultaneous equations framework (Crepon, Duguet
  and Mairesse, 1998)

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Equation 1 RD Intensity

• ln RD log of RD investment per hour worked
• ln K log of Total Capital
• ln Gradshare log of Graduate Share of Labour
  Force
• ln Open Log of export/GDP

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Equation 2 Knowledge production

• ln Patent log of Patents per hour worked
• ln Cit Same country Citations per hour worked
  (a proxy measure for absorptive capacity)
• ln Foreign USPTO patents home country patents
  (indicator of foreign knowledge spillover
  potential)

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Equation 3 Output Production

• ln VA log of Value Added (in US dollars)
• ln Hours log of Total hours worked
• ln LabQual log of measure of workforce skills

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A note on our labour quality measurement

• Using 2 different measures, we hope to capture
  the different ways in which skills and education
  contribute to use of RD and output production
• Graduate share of employment (high level skills)
  particularly important for RD investment and
  development
• General measure of workforce skills (taking
  unskilled labour as a base)

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Key findings

• RD intensity is positively and significantly
  related to market openness and graduate share of
  employment
• Patents per hour is positively and significantly
  related to RD intensity and absorptive capacity
  (proxied by same country citations per hour)
• Productivity is positively and significantly
  related to knowledge (patents) and workforce
  skills measure

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Future Work

• We do not find a significant role for foreign
  patents to identify foreign spillovers
• may need to develop stock measures of foreign
  RD/patents (Bottazzi and Peri 2007)
• Finding a better way to measure interaction
  between absorptive capacity and foreign
  spillovers
• Analysing cross country differences allowing
  coefficients to vary across country

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Conclusion

• Understanding how RD relates to new knowledge
  production and output growth is the focus of
  recent models of economic growth
• Industry level research is still uncommon but
  fits well with a research model that recognises
  the flow of RD investment to innovation to
  output production.