The labour productivity impact of innovation of manufacturing firms in
Bangladesh and Pakistan, a highly neglected region for such studies
compared with the developed world, is studied in this paper by using
World Bank Enterprise Survey data conducted in 2006. To achieve this
end, we apply the Cobb-Douglas production function, augmented with
innovation-related (and other expected sources of productivity) inputs
in a three-equation simultaneous equations system - connecting R&D to
its determinants, innovation output to R&D, and productivity to
innovation output - and in a two-equation system - connecting innovation
output to its determinants, and productivity to innovation output -
after correction for the biases attributable to the selectivity problem
of R&D and to the endogenous nature of both R&D and innovation output.
Our results reveal that Bangladeshi firms are more often innovators as compared to Pakistani ones; however, the productivity output appears to be relatively large in Pakistan. We are generally not able to reject the constant returns to scale assumption. In addition, our econometric analysis indicates a strongly positive influence of both material and capital inputs on firm productivity; moreover, the productivity effect of process innovation is straightforwardly positive, but product innovation seems to be less connected to productivity outputs. Finally, we notice that the traditional production inputs (material and capital) have more significant effects on productivity output as compared to non-traditional input factors (controls in our case).
JEL classification: O31; O32; O33; L60
Keywords: Product and process innovation; Labour productivity; Pakistan; Bangladesh