Firm Innovation, Productivity, and Trade

Firm innovation effort, productivity, and export propensity are found to be positively correlated with one another. Two alternative explanations have been offered for this — innovation increases productivity and more productive firms self-select into exporting or, alternatively, exporting increases learning and innovation, which in turn affects productivity. We use differences in timing implied by these hypotheses to disentangle their importance in a representative panel of Spanish manufacturing firms from 1990-1999. Innovation effort and exporting are allowed to affect estimated firm productivity dynamics. Firms forecast own productivity from past production experience and previous innovation and exporting. Productivity levels and dynamics are identified using errors in the firms’ productivity forecasts. Then estimates of the forecastable component of productivity are related to firm innovation and export decisions.