Public policy, innovation and total factor productivity: An application to Taiwan's manufacturing industry

This paper examines the impact of being an innovator on firm productivity in Taiwan. Using a panel of 48794 firms observed over the 1997-2003 period, and distributed across 23 industries, we compute TFP by estimating Translog production functions with conventional K, L, E, M inputs. We evaluate the impact of being an innovator on TFP using propensity score matching. The rationale is that, over the period, innovating firms are likely to have benefited from one of many innovation policy measures known as IUS (until 1999) or “New IUS” (after 1999). The analysis was conducted separately for 1997-1999 and for 2000-2003. Our results show a significantly negative effect of being an innovator on TFP in every 2-digit industry and in both sub-periods. If TFP is defined as the part of productivity unexplained by conventional inputs, then this means that innovation activities explain a significant part of productivity at the firm level. JEL classification: D24,L60, O33