Innovation and productivity: evidence for 4 Latin American countries manufacturing industry

The literature on firm level productivity in developed countries recognizes the important role played by firm innovation activities on the evolution of firm productivity. However, the literature on this topic for developing and emerging economies is scarcer and far from conclusive. The aim of this paper is to study the innovation-productivity link at the firm level for four Latin American countries (Argentina, Mexico, Colombia and Peru) for the manufacturing sector. The paper distinguishes between different innovations types such as process and product innovations. The data used have been drawn from the World Bank panel Enterprise Surveys, which provides data for these countries for the years 2006 and 2010. Our estimation strategy follows two-steps: first, we estimate TFP measures following De Loecker (2010) approach and Wooldridge (2009) estimation procedure (this allows us to compare results both considering an exogenous or endogenous Markov process for the dynamics of productivity); and, second, we use the estimated TFPs as dependent variables in several models with innovation activities as covariates, in order to disentangle the effects of those variables on the TFP. From our results we confirm that the most productive firms self-select into innovation activities under the endogenous Markov, driven by product innovations, only for Argentina and Mexico. Further, we obtain that there are returns to innovation in terms of productivity for all innovation types, under an exogenous or endogenous Markov process but, again, only for Argentina and Mexico.