Effects of innovation on firm performance

This study was prepared by Stefan Lachenmaier while he was working with the Ifo Institute for Economic Research. It was completed in March 2007 and was accepted as a doctoral thesis by the Economics Department of the University of Munich (LMU). The subject of this study is an econometric analysis of the effects of innovation on firm performance. The main data source for this analysis is the Ifo Innovation Survey, which has provided yearly, firm-level data on innovation since 1982. Following two introductory chapters on innovation, the data set is introduced and explained in detail. Subsequent chapters analyze the effects of different types of innovation on four measures of firm performance, viz. sales, labor productivity, employment and exports. The econometric approach addresses the problems of unobserved firm heterogeneity as well as the potential endogeneity of innovation with respect to firm performance and its dynamics. Taken together, the results indicate that innovations show positive effects on sales, labor productivity and employment; the effects on exports are less clear.