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
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
KOF’s core research areas
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
2
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Outline of the presentation
 Introduction / research question
 Literature overview
 Model specification
 Data
 Empirical results
 Concluding remarks
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
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Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
4
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Literature overview
 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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
5
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
6
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
8
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Model specification
 Reformulate the standard Cobb-Douglas
production function to:

Equation explaining the level of (log) labour productivity

Equation explaining growth in labour productivity
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
9
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
10
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Model specification & data
 Dependent variable:

(log of) value added per employee

growth of value added per employee
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
11
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Histogram –
Labour productivity (5196 obs.)
0.000010
Mean:
136,000
CHF
Median: 120,500
CHF
Mode:
104,000
CHF
0.000008
0.000006
0.000004
0.000002
0.000000
0
80,000
160,000
240,000
320,000
400,000
480,000
in CHF
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
12
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Histogram –
Labour productivity growth (1226 obs.)
2.00
1.75
Mean:
5.6% (over 3 years)
Median: 4.4% (over 3 years)
1.50
1.25
1.00
0.75
0.50
0.25
0.00
-100%
OECD productivity workshop
-50%
0%
Jan-Egbert Sturm / kof@kof.ethz.ch
50%
100%
13
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
14
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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)
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
15
New products
Patent applications
R&D activities
Process innovation
Obs.\Corr.
Product innovation
Correlation
matrix
Innovation activity
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Labour productivity
0.08 0.09 0.07 0.11 0.10 0.10
Innovation activity
Product innovation
Process innovation
R&D activities
Patent applications
New products
5192
5192
5192
5149
5104
4863
OECD productivity workshop
0.80 0.72 0.70 0.30
5196 0.49 0.68 0.35
5196 5196 0.53 0.23
5153 5153 5153 0.40
5108
4863
Jan-Egbert Sturm / kof@kof.ethz.ch
5108
4863
0.37
0.41
0.29
0.41
5075 5108 0.39
4824
4786
4863
16
Labour prod. growth
Innovation activity
Product innovation
Process innovation
R&D activities
Patent applications
New products
OECD productivity workshop
New products
Patent applications
R&D activities
Process innovation
Obs.\Corr.
Product innovation
Correlation
matrix
Innovation activity
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
-0.02 -0.03 -0.05 -0.01 0.02 -0.03
1224
1224
1224
1209
1204
1191
0.77 0.72 0.69 0.32
1224 0.45 0.67 0.37
1224 1224 0.52 0.26
1209 1209 1209 0.43
1204
1191
Jan-Egbert Sturm / kof@kof.ethz.ch
1204
1191
0.34
0.39
0.28
0.39
1194 1204 0.40
1176 1172
1191
17
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Effect of firm size on labour productivity
25%
20%
15%
10%
5%
0%
<20
OECD productivity workshop
20-50
50-100
100-200
200-500
Jan-Egbert Sturm / kof@kof.ethz.ch
500-1000
≥1000
L
19
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Results: level equation, OLS
(1)
Dummy foreign firms
Share tertiary education
Capital/labour ratio
Innovation activity
Product innovation
Process innovation
R&D activities
Patent applications
New products
Obs.
adj. R2
OECD productivity workshop
0.10 ***
0.07 ***
0.27 ***
(2)
0.10 ***
0.07 ***
0.27 ***
0.00
(3)
0.10 ***
0.07 ***
0.27 ***
(4)
0.10 ***
0.07 ***
0.27 ***
(5)
0.10 ***
0.07 ***
0.26 ***
(6)
0.11 ***
0.07 ***
0.26 ***
(7)
0.10 ***
0.07 ***
0.26 ***
0.00
0.01
0.01
0.05 ***
0.03 ***
3,785
0.50
3,785
0.50
3,785
0.50
Jan-Egbert Sturm / kof@kof.ethz.ch
3,785
0.50
3,755
0.50
3,717
0.50
3,694
0.50
20
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
21
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Results: level equation, 2SLS
(1)
Dummy foreign firms
Share tertiary education
Capital/labour ratio
Innovation activity
Product innovation
Process innovation
R&D activities
Patent applications
New products
Obs.
OECD productivity workshop
0.10 ***
0.07 ***
0.27 ***
(2)
0.10
0.08
0.27
0.20
(3)
***
***
***
**
0.09 ***
0.08 ***
0.27 ***
(4)
0.09 ***
0.08 ***
0.27 ***
(5)
0.09 ***
0.08 ***
0.27 ***
(6)
0.09 ***
0.08 ***
0.27 ***
(7)
0.09 ***
0.08 ***
0.28 ***
0.16 *
0.08
0.13 *
0.08
0.01
3,785
2,708
2,708
Jan-Egbert Sturm / kof@kof.ethz.ch
2,708
2,704
2,680
2,639
22
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
Results: growth equation
(1)
Dummy foreign firms
Initial labour productivity
Share tertiary education
Capital/labour ratio
Innovation activity
Product innovation
Process innovation
R&D activities
Patent applications
New products
Obs.
adj. R2
OECD productivity workshop
(2)
(3)
(4)
(5)
(6)
(7)
0.06 **
0.06 **
0.06 **
0.06 **
0.06 **
0.05 **
0.06 **
-0.20 *** -0.20 *** -0.20 *** -0.20 *** -0.20 *** -0.21 *** -0.21 ***
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 *** 0.21 ***
0.04 **
0.03
0.01
0.04 **
0.03
0.05 **
793
0.32
793
0.32
793
0.32
Jan-Egbert Sturm / kof@kof.ethz.ch
793
0.32
784
0.32
779
0.32
775
0.32
23
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
24
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
25
Konjunkturforschungsstelle
Swiss Institute for Business Cycle Research
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
OECD productivity workshop
Jan-Egbert Sturm / kof@kof.ethz.ch
26
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