Innovation input, innovation output and firm performance: A dynamic panel analysis

This study provides empirical evidence on firm performance impact of innovation in Germany based on data generated from Mannheim innovation panel over the years 2003-2010. The data which consist of a large number of manufacturing and service sectors across the country are collected on the basis of the standard Community Innovation Survey (CIS) guidelines which allow us to develop two ways of measuring innovation: using innovation input and innovation output. A quantitative indicator, innovation input takes R&D intensity, investment innovation intensity and total innovation intensity while innovation output is measured by product innovation to firm, product innovation to market and process innovation. Further, we proxy firm performance by labor productivity and estimate the effects the two innovation categories have on productivity of labor using system GMM estimator which takes into account endogeneity, fixed effects and time dynamics. The estimations show three major results: i) that innovation input and innovation output have different impacts on productivity of labor, ii) elasticity of labor productivity with respect to innovation input and innovation output differ among manufacturing, services, and manufacturing and services (aggregates of industries), and iii) innovation input tends to explain performance of output per unit labor better than innovation output does.