Impact of rd on the productivity growth of manufacturing firms in vietnam

• LISTOFTABLESTable2.1:Overviewofmainproductivity measures...8 Table3.1:Science&TechnologyOrganizationsinVietnamby31Dec2003...26 Table3.2:Ranking ofmostwantedservicesforfirmsandmostcapab

TRUONG D8| HQC #|HH TETP.MCH

A CD*÷ TA O CHUOMGTR|NH º

UNIVERSITYOFECONOMICS

'

HOC H I M I N I J

C I T Y VIETNAM

INSTITUTEOFSOCIALSTUDIEST

HEHAGUETHEN E T H E R L A N D S

VIETNAM— N E T H E R L A N DS PROJECTO N DEVELOPMENT ECONOMICS

IMPACTOFR&DONTHEPRODUCTIVITYGR OWTHOFMANUFACTURINGFIRMSINVIETN

AM

Duong ThiPhuongNgocAcademicsupervisor:

Dr.VoVanHuy

HoChiMinhCity,November,2008

Icertifythatthesubstanceofthisthesishasnotalreadybeensubmittedforanydegreeandisnotbeingcurrentlysubmittedforanyotherdegrees

Ialsocertifythat,tothebestofmyknowledge,anyhelpreceivedinpreparing

thisthesis,andallsourcesused,havebeenacknowledgedinthethesis

Signature

DuongThiPhuongNgoc

Incompletingthisthesis,Iamindebtedtonumerousi n d i v i d u a l s butIcannotnamethemallhere.Firstofall,IwouldliketothankallthestaffandteachersoftheProjectfort h e i r

v a l u a b l e l e s s o n s , g o o d l e a r n i n g f a c i l i t i e s a n d w a r m a t t i t u d e s

d u r i n g m y schooltime.Mydeepestgratitudegoestomysupervisors,Dr.VoVanHuy,andDr.NguyenTrongH o a i f o r t h e i r v a l u a b l e c o m m e n t s a n d i n s t r u c t i

o n s c o n c e r n i n g m y thesis.IamalsoverygratefultoMr.LuongVinhQuocDuy,ateacheroftheProject,forhissupportandlecturesineconometrics.Finally,Iwouldliketothankmyfriends,myfamilywhohavebeenalwaysbehindme,givenmemoralsupport,encouragement,a n d sympathyt ha thavehelpedmegainmores t r e n g t h tocompletethiswork

Thiss t u d y e x a m i n e s t h e r e l a t i o n s h i p b e t w e e n R & D e x p e n d i t u r e a n

d p r o d u c t i v i t y growthofmanufacturingfirms inVietnam.Dataon264manufacturingfirms havingpositiveR & D , w h i c h w a s d r a w n f r o m t h e d a t a s e t o f V i e t n a m

E n t e r p r i s e S u r v e y conductedbytheGeneralStatisticsOfficein2004,isusedforanalysis.Aregressionmodeli s es ti mat ed b a s e d o n t h e C o b b -

D o u g l a s p r o d u c t i o n f u n c t i o n a n d the R & D capitalmodelwiththreemainindependentvariables:physicalcapital,

laborandR&Dcapital,anddummyvariablesreflectingtypeofownershipandsizeoflabor

R&DcapitalismeasuredinasimplewaybyusingavailableR&Dexpenditureinthesurveyandignoringtheaccumulationo f R&Dexpenditureinthepast,i ts deflationandobsolescence.However,apositiveandsignificantimpactofR&Dexpenditureonproductivityi s foundwiththeelasticityofproductivityw i t h respecttoR&Dexpenditureperlaborisabout0.1.Moreover,theeffects

ofphysicalcapitalandlaboronp r o d u c t i v i t y area l s o p o s i t i v e l y ands t a t i s t i c a l

l y s i g n i f i c a n t T h e e l a s t i c i t i e s o f productivitywithrespecttophysicalcapit

al perlaborandtotallaborarearound0.35and0.15,respectively

CHAPTERI:I N T R O D U C T I O N 1

1.1 RATIONALEOFTHERESEARCH 1

1.2 OBJECTIVEOFTHERESEARCH 3

1.3 RESEARCHMETHODOLOGY 3

1.4 THESISSTRUCTURE 3

CHATPER2:LITERATUREREVIEW 5

2.1 INTRODUCTION 5

2.2 CONCEPTS 5

2.2.1 Researchandexperimentaldevelopment(R&D) 5

2.2.2 Productivity 7

2.2.3 Manufacturingsector 8

2.3 ECONOMICTHEORIES 9

2.3.1 Productiont h e o r i e s 9

2.3.1.1 Cobb-DouglasP r o d u c t i o n F u n c t i o n 9

2.3.1.2 TheLawofDiminishingReturns 11

2.3.2 R&DCapitalModel 12

2.3.3 Suggestedresearchmodelfromeconomictheories 14

2.4 EMPIRICALSTUDIES 15

2.4 1 Overview 15

2.4.2 R&DandProductivityinFrenchmanufacturingfirms 16

2.4.3 R&DandProductivityGrowthinJapanesemanufacturingfirms 18

2.4.4 TheeffectofR&DCapitalonDanishFirmProductivity 19

2.5 SUMMARY 20

CHAPTER3:OVERVIEWOFR&DANDFIRMPERFORMANCEINVIETNAM 22

3.1 INTRODUCTION 22

3.2 R&DACTIVITIESINVIETNAM 22

3.3 STRUCTUREOFTHER&DSYSTEMINVIETNAM 25

3.4 LINKAGEBETWEENTHEPRODUCTIVESECTORANDR&DINSTITUTIONS 27 3.5 SUMMARY 29

CHAPTER4 : R E S E A R C H METHODOLOGY 30

4.1 INTRODUCTION 30

4.2 MODELS P E C I F I C A T I O N 30

4.3 DATAT R A N S F O R M A T I O N 34

4.3.1 Laborproductivitybasedonoutput(Y/L) 34

4.3.2 Physicalcapitalperlabor(K/L) 35

4.3.3 R&Dexpendituresperlabor(R/L) 35

4.3.4 Firmsizes(LARGESCL,MEDIUMSCL) 35

4.3.5 Typesofownership(STATE,FOREIGN) 36

4.4 SUMMARY 36

CHAPTER5:RESULTANALYSIS 37

5.1 INTRODUCTION 37

• 5.2 FIRMSCHARACTERISTICS 37

5.3 REGRESSIONANALYSIS 43

5.3 SUMMARY 47

CHAPTER6:CONCLUSIONSANDRECOMMENDATIONS 48

6.1 CONCLUSION 48

6.2 POLICYRECOMMENDATIONS 50

6.2.1 Experienceo f Korea 50

6.2.2 PolicyRecommendations 51

6.3 LIMITATIONSO F THERESEARCH 52

54 APPENDIX 57

Appendix1 : ASystemModelforTechnologicalInnovation 58

Appendix2:Regressionresults 59

Appendix3:WhiteHeteroskedasticityT e s t 59

• LISTOFTABLES

Table2.1:Overviewofmainproductivity measures 8

Table3.1:Science&TechnologyOrganizationsinVietnamby31Dec2003 26

Table3.2:Ranking ofmostwantedservices(forfirms)andmostcapableactivities (foracademicinstitutions)ofenterprises 28

Table5.1:IndustrialClassification oftheSample 39

Table5.2:StatisticsSummary 41

Table5.3:Correlationmatrixfromthevariablesinthefunction 43

Table5.4:Coefficientsandstatisticsfortheproductivitymodel 45

LISTOFFIGURES ' Figure2.1:Theeffectoftechnologyimprovement 12

Figure3.1:PercentageofGDPspentonR&Din1996 23

Figure3.2:ExpenditureonR&DbyGovernmentandBusiness sectorin2002 23

Figure3.3:Sector-wiseR&DExpenditureinVietnamin2002 24

Figure3.4:R&DPersonnelperThousandofTotalemployeesinz002 25

Figure5.1:R&Dfirmsbyownership 38

Figure5.1:Structureoffirmsbysize 38

Figure5.3:Totalcostforresearch&developmentoftechnologybyresources 42

Figure5.4:Totalcostforresearch&developmentoftechnologyl›ypurposes 42

GrossDomesticProductMultifactorP r

o d u c t i v i t yMinistryofScienceandTechnologyClassificationofEconomicActivitiesintheEuropeanCommunityNationalInstituteforScienceandTechnologyPolicy&StrategyStudiesOrganizationforEconomicCooperationandDevelopment

OfficeofScienceandTechnologyPolicyResearch&Development

SmallandMediumEnterpriseVietnamEnterpriseSurveyVietnameseDong

i z a t i o n forE c o n o m i c CooperationandDevelopment(OECD)spendsignificantamountsonR&Dactivities.

,

Ona v e r a g e , O E C D c o u n t r i e s h a v e s p e n t m o r e t h a n 2 p e r c e n t o f G D P o

n a n n u a l publicandprivateR&Dinvestmentsduringthelasttwodecades(OSTP',1997)

Inatraditionalway,firmshavepaidattentiontoR&Dbecausethetechnicaladvancesresultingfrominnovationmayallowthemtoimprove

productivity,succeedincompetitivemarkets,andmeetenvironmentala n d regulatoryrequirements.Besides,R&Dhas a l s o hadc o n t r i b u t i o n t o thed e v e l o p m e n t o

f newp r‹ ›d uc ts a n d , inmanycases,thecreationofnewmarkets.Withinfirms,economicreturnsarealwaystakenintoconsiderationondecidingtheimportanceandnatureofR&Dperformance.Firmsusuallyt a k e parti n R&Dac t i v i t i e s o n l y whent h e resultsa r eappropriatea n d of fe r higherr a t e s o f r e t u r n t h a n t h a t o f o t h e r a v a i l a b l e i n

v e s t m e n t a l t e r n a t i v e s s u c h a s acquisitionofnewmachinery,advertising,orpurchaseofspeculativeassets

Therea r e manys o u r c e s f o r productivityi m p r o v e m e n t s , b u t o n e s t r a t e g

y f o r enhancingproductivitygrowthwhichiswidelyacknowledgedisincreasingthestockofknowledge.T h i s s t o c k o f knowledgec a n bei n c r e a s e d b y f o r m a l i n v e s

t m e n t i n

'OSTPisOfficeofScienceandTechnologyPolicy

R&Dactivities.Intheprivateandpublicsectors,theallocationofresourcestowardtheinvestmenttogeneratenewknowledgemustbedecidedcarefully

Ins p i t e o f t h e i m p o r t a n c e

o f R & D i n f i r m s ’ p r o d u c t i v i t y , R&Da c t i v i t i e s h a v e n o t beentakenintoconsiderationformuchinvestmentinVietnam,es.peciallyinbusinesssector.WhilemostOECD countries andChinadevoteda r o u n d 2%oftheirGDPtoR&Dactivities,Vietnams p e n t only0.5%ofitsGDPforthispurpose( N g u y e n an dTran,n d ) R &

D e x p e n d i t u r e o f Vietnamese e n t e r p r i s e s a c c o u n t e d f o r o n l y a b o u t 20

%ofthetotalR&Dexpenditureofthecountryin2002(Nguyen,n.d.).W h e r e a s ,accordingtoOSTP(1997),companiesinOECDcountriesfinancemorethan50%ofallR&Dexpenditureandtheyconducttwo-thirdsofall

R&Dactivities.SMEsmakeupt h e v a s t majorityofr e g i s t e r e d companiesinV

at.,2000).Mo re ove r, t h e mosti m p o r t a n t reasonf o r a li tt le i n v e s t m e n t i n R&

Da c t i v i t i e s o f Vietnamesee n t e r p r i s e s m a y b e theirlimitationsinfinancialresources

Thecaseof

VietnamraisesadoubtifR&Dhasanyrelationshipwithproductivityof manufacturingf i

r m s Practically,therearemanyempiricals t u d i e s atfirmlevelthathasemphasizedtheroleoftechnologicalorknowledgecapitalinproductivitygrowth.Earlystudies

focusedonR&Dinvestmentandfoundthat inmost countries,R&Dhas

Thethesisusedsuchmethodsasdescriptivestatistics,quantitativeanalysisandOLSregressiontodealwiththeresearchquestions.

e w T h i s chapterexaminestheoriesandempiricalstudiesr e l a t i n g t o t h e impactof

R & D

l u s i o n s a n d p o l i c y recommendationsareprovidedinConclusionsandRecommendationsch

apter.

CHATPER2 LITERATUREREVIEW

2.1 INTRODUCTION

Thisc h a p t e r a i m s a t reviewingl i t e r a t u r e r e l a t e d t o thetopict o ma ke s u r e thatt h e researchisconductedbasedonascientificbackground.Thechapterwillbepresentedinthreemainparts.Intheparto ne , keyconcepts relatedt o thetopicsuchasR&D,productivityasw e l l a s m a n u f a c t u r i n g w i l l b e d i s c u s s e d E c o n o m i c t h e o r

i e s supportingforthestudyarefoundoutandstatedinthenextpart.Attheendofthispart,a researchm o d e l w h i c h representsf a c t o r s a f f e c t i n g productivityi s suggested.Finally,e m p i r i c a l s t u d i e s regardinge f f e c t ofR&Donproductivityg r o

w t h o f manufacturingf i r m s i n s o m e countries a r e d i s c u s s e d i n thel a s t part.T

h r o u g h t h i s chapter,impactofR&Dexpenditureonproductivitygrowth isgenerallyfiguredoutonthebasisofeconomictheoriesandempirical studies

oBasicr e s e a r c h ise x p e r i m e n t a l ort h e o r e t i c a l

w o r k t h a t i s u n d e r t a k e n nott o

obtainlong-termbenefitsbuttoadvancethestateofknowledge(CBO,2005).Inbasicresearch, c h

a r a c t e r i s t i c s , s t r u c t u r e s andrelationshipsa r e analysedwitha viewtoformulate a n d testhypotheses, t h e o r i e s a n d laws Theresultso f basic

researcharenotforsalebutusuallyforpublishinginscientificjournalsorusageofinterestedpeople.Sometimes, itmaybekeptsecretforsecurityreasons

Appliedr e s e a r c h i s alsooriginalworkthatisundertakent oacquirenewknowledgewithaspecificapplicationinview.Its’aimsaredeterminingpossibleusesf o r resultso f basicresearcho r determiningnewwaysto achievespecificobjectives.Resultsofappliedresearcharemainlyvalidforalimitednumberofproducts,o p e r a t i o n

s , m e t h o d s or systems.Theknowle‹lgeo r informationresultingfromappliedresearchisoftenappliedforpatent orwaybekeptsecret

Experimentald e v e l o p m e n t i s s y s t e m a t i c w o r k u s i n g c • x i s t i n g k n o w l

e d g e gainedfromresearchandpracticalexperience.Theseresearchandexperienceisdirectedtowardproducingne w materials,productsanddevices;installingnewprocesses,s y s t e m s o r services;orsubstantiallyi m p r o v i n g whathasbeenproducedorinstalled inthepast

Fore x a m p l e , b a s i c r e s e a r c h i s t h e t h e o r e t i c a l i n v e s t i g a t i o n o f f a c t o

r s w h i c h h a v e influenceo n regionalv a r i a t i o n s i n economicg r o w t h Appliedr

e s e a r c h i s theinvestigationthatisp e r f o r m e d fort h e developmentofg o v e r n m e

n t policy.Experimentald e v e l o p m e n t i s thedevelopmento f operationalmodelsbasedonlawswiththepurposeofmodifyingregionalvariations

“ExpenditureonR&Dmaybemadewithinthestatisticalunitoioutsideit”(OECD,1994).Themeasuremento f suchtwokindsofR&Dexpendituresi s socomplicatedwithm a

n y c o s t s s h o u l d b e i n c l u d e d ore x c l u d e d H o w e v e r , int h i s t h e s i s ,

R & D expenditureusedtoexamineitseffectsonproductivityg r o w t h ofVietnamesemanufacturingfirmsisavailableintheVietnamEnterpriseSurvev

Scientificandtechnologicalinnovationisknownasthetransformationofanideaintoaneworimprovedproduct,anew

orimprovedoperationalprocessoranewapproachtowarda so c i a l s e r v i c e T h e r e a r e d

i f f e r e n t m e a n i n g s i n d i f f e r e n t c o n t e x t s f o r the

word“innovation”dependingoncertainobjectivesofmeasurementoranalysis.N e w productsorprocessesandsignificanttechnologicalchanges inproductsorprocessesarec o n

s i d e r e d ast e c h n o l o g i c a l innovations.Ani n n o v a t i o n isp e r f o r m e d ifi t

i s broughtouttothemarketorusedinaproductionprocess.Thus,innovationsincludedozenso f activitiesr e l a t i n g t o sc ienc e, technology, o r g a n i z a t i o n , f i n a n c e

a n d commerce R&Disoneofsuchactivitiesanditmaybedoneatdifferentstagesoftheinnovationprocess'.R&Dc a n a c t a s t h e o r i g i n o f i n v e n t

i v e ideaso r a f o r m o f

problem-solving( O E C D , 1 9 9 4 ) AccordingtoRogers(1998),R&Disanimportantinputmeasureofinnovation

- Af r e q u e n t l y s t a t e d o b j e c t i v e o f m e a s u r i n g p r o d u c t i v i t y growthi s t o t r a c e

technicalchange.

- Productivitygrowth

isalsomeasuredtoidentifychangesinefficiencywhichisconceptuallydifferentfromt

echnicalchange.Fullefficiencyinanengineeringsensemeansthataproductionpr ocess hasachievedthemaximumamountofoutputthatisphysicallyachievablewithcurrenttechnology,and givenafixedamountofinputs

'SeeAppendix1forexplanationofinnovationprocess.

Typeof output m easure

Typeofinputmeasure

Labor Capital Capitalandl a b o r

Capital,laborand intermediateinputs (e nergy,materials,serv

ices) Gross

output

Labor productivity (basedongross output)

Capital productivity (basedongross output)

laborMFP (basedon grossoutput)

Capital-KLEMSm u l t i f a c

t o r productivity Valueadd

ed

Labor productivity (basedonvalue added)

Capital productivity (basedonvalue added)

laborM F P (based onvalueadded)

Capital-Singlefactorproductivitymeasures Multifactorproductivity (MFP)

measures

There aremanydifferentwaystomeasureproductivity,whichdependonthepurposeofproductivitymeasurementortheavailabilityofdata.P r o d u c t i x ' i t y measurescanbedividedintot w o k i n d s : s i n g l e f a c t o r p r o d u c t i v i t y measuresa n d m

a b o u r productivityi s ausefulm easu re b e c a u s e i t relatestothemostimportantfactorofproductionl a b o u r andisrelativelyeasytomeasure

2.2.3.M a n u f a c t u r i n g sector

Accordingt o theU S Ce nsus Bureau, t h e m an ufa ct ur in g s e c t o r i n c l u d e s establishmentswhichareusedinthephysicalorchemicaltransformationofmaterials,substances,orcomponentsi n t o newproducts.E x c e p t a c t i v i t i e s i n theConstruction

sector,manufacturingi s alsoconsidereda s

t h e assemblingofpartsofmanufacturedproducts,theblendingofmaterials,andsomeotherrelatedactivities

Manufacturinge s t a b l i s h m e n t s a r e oftenknowna s plants,f a c t o r i e s o r mills.Theymayprocessmaterialsbythemselveso r signcontractswithothers toprocesstheirmaterialsforthem.Manufacturingestablishmentstransformmaterials,substancesorcomponentswhicharerawproductso f agriculture,f o r e s t r y , f i s h i n g , mining

a n d soon.T h e n e w p r o d u c t s o f manufacturing e s t a b l i s h m e n t s m a y b e f

i n i s h e d p r o d u c t s , whicha r e readyf o r useo r consumption, o r

semi-finishedp r o d u c t s , w h i c h b e c o m e inputsforotherestablishmentstouseinfurthermanufacturing

u r e r F o r i n s t a n c e , electroniccomponents

belongtoComputerandElectronicProductManufacturingandstampsbelongtoFabricatedMetalProductManufacturing

2.3.1 Productiontheories

2.3.1.1 Cobb-DouglasP r o d u c t i o n F u n c t i o n

AccordingtoPindyckandRubinfeld(1992),theCobb-Douglasproductionf u n c t i o n

isawidely-usedapproach torepresenttherelationshipbetweenanoutputandinputsinmicroeconomics.K n u t Wicksell p r o p o s e d t h e functioni n theperiod1 8 5 1 - 1 9 2 6 ,

Outputelasticitymeasurestheresponsivenessofoutputtoachangeinlevelsofeitherlaboror capitalusedi n production,c e t e r i s paribus.F o r example,i f o=0.15,a1 % increasei

n l a b o r w o u l d l e a d t o a p p r o x i m a t e l y a 0 15%increasei n o u t p u t Furthermore,ifo+§=1,theproductionfunctionexhibitsconstantreturnstoscale.Ifo=§ <

1,therea r e d e c r e a s i n g r e t u r n s t o s c a l e , a n d i f o + § >1,thent h e r e a r e increasingr e t u r n s t oscale.Forexample, i f La n d Ke a c h are increasedby2 0 % , Yincreasesby20%wheno+§=1.Yincreasesmorethanandlessthan20% wheno+

§< 1 a n d o+ §< 1, r e s p e c t i v e l y T h e Douglasproductionf u n c t i o n issometimeswritteninlogarithmicform:logQ=logA

Cobb-÷ologL=§logK.Thisformisusefulwhenperformingaregressionanalysis

Pindyckand Rubinfeld(1992)statedthatageneralproductionhinction, Q= F(K,L),appliestoagiventechnology.Thismeansa

givenstateofknowledgemightbeusedinthetransformation o f i n p u t s i n t o outp

ut W h e n t e c h n o l o g y i s improved a n d the productionf u n c t i o n changes,afirmcanobtainmoreoutputwithagivennumberofinputs.Forinstance,anewandfastercomputerchipmayena ble ahardwaremanufacturer

toproducecomputerswithhigherspeedinagivenperiodoftime

TheC o b b

-D o u g l a s p r o d u c t i o n f u n c t i o n h e l p s t o i l l u s t r a t e a wayt o m e a s u r e productionfunctions.However, itisoftenreplacedbyothermorecomplexproduction

- functions

ini n d u s t r y studiesf o r s o m e r e a s o n s Oneo f t h e r e a s o n s accordingt o Pindycka n d Rubinfeld( 1 9 9 2 ) i s thatt he C o b b -

D o u g la s f u n c t i o n d o e s nota l l o w a possibilityh a p p e n i n g i n t h e r e a l i t y T

h e p o s s i b i l i t y ist h a t t h G f i r m sp r o d u c t i o nprocesss h o w s increasingr e t u r n

s a t lowoutputl e v e l s , c o n s t a n t returns a t intermediateoutput,anddecreasingreturnsathighoutputlevels

2.3.1.2.T h e Lawo f DiminishingR e t u r n s

PindyckandRubinfeld(1992)statedthelawofdiminishingreturnsthat“astheuseofaninputincreases

(withotherinputfixed),apointwilleventuallybereachedatwhichtheresultingadditionstooutputdecrease”.Whenthelaborinputissmallandcapitalinputi s f i x e d, a smalli n c r e a

s e i n l a b o r i n p u t willl e a d t o a s u bs t a n t i a l i n c r e a s e i n outputbecauseworkersareallowedtodevelopspecializedtasks.However,whentoomanyw o r k e r s a r e u s e d i n t

h e p r o d u c t i o n , s o m e o f t h e m b e c ‹ a m e i n e f f e c t i v e a n d thereforet h e marginalp r o d u c t o f laborf a l l s Thatis calledth e l a w o f diminishingreturns

runanalysesbecauseaccordingtothedefinition,atleastoneinputisfixed.However,itsometimescanbeappliedtolong-

Thelawofdiminishingreturnsisoftenappliedinshort-runanalyses.Thereisonepointneededtopayattentiontoisthatthelawo f d i m i n i s h i n

g r e t u r n s d i f f e r s f r o m d e c r e a s e i n o u t p u t d u e t o c h a n g e s i n t h e qualityoflaborwhenlaborinputareincreased.Forinstance,whc•nthemost

qualifiedworkersa r e h i r e d f i r s t , t h e o u t p u t w i l l i n c r e a s e m u c h a c c o r d i

n g l y H o w e v e r , t h e outputmayn o t goupo r goupatalowlevel whentheleastcJualifiedworkers a r e hiredlast.Intheanalysisofproduction,wehavetoassumethatthequalityofalllaborinputa r e thes a m e Diminishingr e t u r n s r e s u l t f r o m l i m i t a t i o n s o

n theuseo f otherfixedinputssuchasmachinery,n o t fr om declinesinworkerq u a

l i t y Moreover,we shouldn o t c o n f u s e d i m i n i s h i n g r e t u r n s w i t h n e g a t i v e

r e t u r n s I n th e l a w o f diminishingreturn,adecliningmarginalproductisdescribed,not.anegativeone.

Int h i s l a w , a g i v e n p r o d u c t i o n t e c h n o l o g y i s a l s o a s s u m e d H o w e v e r, o v e r t i m e , inventionsand

technologyimprovementsmayallowtheentiretotalproductcurvetoshift

upward,thus,moreoutputcanbeobtainedwiththesameinputs.Althoughanygivenproductionp r o c es s hasdiminishingreturnstolabor,laborproductivityc a n increasei f therea r e i m p r o v e m e n t s i n the t e c h n o l o g y A c c o r d i n g t o thef i g u r e 2 1,improvementsi n technologym a y allowtheoutputcurvetoshiftupwardf r o m O;toO,andthenO

Figure2.1:The effecto f technologyi m p r o v e m e n t

Output pertim eperio d

LaborvertimeS ource:PindyckandRubinfeld,1992

12

inlogarithmicformfromtheCobb-u c h morecomplexrelationship.I n thisfirsteqinlogarithmicformfromtheCobb-uation,y,theelasticityofoinlogarithmicformfromtheCobb-utpinlogarithmicformfromtheCobb-utwithrespecttoresearchcapital,isfocusedtobeestimated.R&Dcapitalisoftencalculated

byaweightedsumofpastR&DexpenditureswiththeweightsreflectingboththepotentialdelaysintheimpactofR&Donoutputanditspossibleeventualdepreciation

Inthesecondapproach,growthratesareusedtoreplacelevelsandtheaboveequationbecomesasfollows:

However,investinginthecreationofknowledgeisnotsimilartobuyingamachineorbuildingaplant.Itisquitedifficulttomeasuretheresultsofsuchactivities.Nevertheless,t h i s simplemodelisconvenientlyastartingpointtoexamineempiricalworksinthisareaanda p p l i c

a b l e t o ou r problemi f wea r e able toc o n s i d e r theirc o n c e p t u a l a n d d a t a problems

Withreferencetoeconometricissueonapplyingthismodel,Griliches(2000)statedthatthereissimultaneityproblemreferringtopossibleconfusionincausality:“futureoutputanditsprofitabilitydependonpastR&D,whileR&D,inturn,depends

onbothpastoutputandabletobuildasystemofequationsinwhichcurrentoutputdependsonpastR&D,andpastR&Ddependsonpastoutput”.However.withcross-

sectionaldata,itismuchmoredifficulttomakesuchdistinctions

2.3.3 Suggestedr e s e a r c h m o d e l f r o m e c o n o m i c theories

Basedontheaboveeconomictheories,therelationshipbetweenfirmproductivityanditsdeterminantscanbedescribedinafunctionwithdependentandindependentvariablesasfollows:

Y=f[L,K,R,CHAR(SIZE,OWNERSHIP)](2.4)

14

u l t s o f s u c h relationshipspreadawiderange.Someresearcheshavefoundthat

R&Dvirtuallyhasnoeffectonproductivity.Whereas,

otherstudieshavediscovere‹lthatR&D’seffectissubstantialandlargerthaneffectofotherkindsofinvestment.however,mostoftheestimatesliesomewherebetweenthetwoextremes,therefore,thereisanagreementwiththeviewthattherelationshipbetweenR&Dspendingandproductivitygrowthispositivelysignificant

MairesseandS a s s e n o u ( 1 9 9 1 ) c o n d u c t e d ar e s e a r c h

w h i c h surveyse c o n o m e t r i c studiesexaminingtherelationshipb e t w e e n R

& D andproductivitya t thefirmleveland

Douglasproductionfunctionisthebasicanalyticalframeworkusedbymosteconometricstudiesthat

assessestheresultsaswellasproblemsencountered.Accordingtothoseauthors,theCobb-estimatethecontributionofR&Donproductivitygrowth.Inadditiontosuchusualfactorsofpro

ductionaslabor,physicalcapital,materialsandsoon,ameasureofR&Dcapitalisalsoincludedinthe functionasexplanatoryvariable.

TheCobb-Douglasproductionfunctionhasanadvantagethatitcan beestimatedasalinearregressionifallvariablesaretransformedintologarithmicforms

Onv i e w i n g p r o b l e m s encounteredasm e n t i o n e d above,M : i i r e s s e andSassenou(1991)statedthateconometricianstrytosimplifyphenomenawhichareoftenhighlycomplexo n e s T h i s i s e s p e c i a l l y t r u e w i t h R & D

s t i c i t y o r R&Drateofreturnarestatisticallysignificantandfrequentlyplausible

TheabovearewhatCBO(2005)andMairesseandSassenou(1.991)foundoutwhenreviewing

andsynthesizingrelatedstudies.However,thethreecasestudiesbelowwillhelptoinvestigatefurthertherelationshipbetweenR&Dandprc›ductivityinpractice

2.4.2.R & D andProductivityi n Frenchm a n u f a c t u r i n g f i r m s

D o u g l a s p r o d u c t i o n f u n c t i o n , which c a n b e writteni n logarithmicformasfollows:

(2.5)

Wherei,trefertothefirmandthecurrentyear;eistheerror termintheequation;v,c,1andkstandforproduction(valueadded),physicalcapital,labor,andR&Dcapital,respectively;p =o§+yisthecoefficientofreturnstoscalc•;andXistherateofdisembodiedtechnicalchange

Int h i s s t u d y , p r o d u c t i o n ism e a s u r e d bydeflatedv a l u e

-a d d e d Vr -a t h e r t h -a n b y defl-ateds -a l e s L-abourLisme-asuredb ythenumbero femployees,p h y s i c a l c a p i t a l stockCbygross-

plantadjustedforinflation.R&DcapitalstockKiscalculatedbytheweightedsumofpastR&Dexpenditurewhichuseaconstantrateofobsolescenceof15percentperyear.Twovariables,laborand

physicalcapitalstockarecorrectedforthed o u b l e c o u n t i n g b e c a u s e t h e y a r e a

l r e a d y i n c l u d e d i n t h e R & D c a p i t a l s t o c k Thus,thea v a i l a b l e n u m b e r o fR&De mp lo yees i s simplys u b t r a c t e d f r o m thetotalnumbero f e m p l o y ee s W

h e r e a s , t h e parto f physicalc a p i t a l s t o c k u s e d i n R&Di s calculatedbasedontheaverageratioofthephysicali nv est men t componentofR&Dexpenditurestot o t a l R

& D e x p e n d i t u r e s andi s a l s o s u b t r a c t e d H o w e v e r , int h e practiceo fVietnam,because havingf ul l financials t a t e m e n t s ‹afexaminedf i r m s isverydifficult,itisi m p o s s i b l e toseparatethep a r t ofp h y s i c a l capitalinR & D expenditurefromthetotalphysicalcapitalstock

Theau th or s f i n a l l y c o m e up withd i s c r e p a n c i e s b e t w e e n t h e t o t a l a n d w

i t h i n - f i r m estimatesofthetwo

mainparameters:theelasticityofphysicalcapitalstocks(o)andR&Dcapitalstocks(y).However,duetogood

measuresofthevariables,theproblemism u c h lessserioust h a n itc o u l d havebeen,anding e n e r a l theestimatesarestatisticallysignificantandlikelyhigh.Besides,inordertofindoutfurtherresults,theauthorsusedsalesinsteadofvalueaddedandincludedandexcludedmaterialsMinturnintheproductionfunction.Thetotalestimatesusingsalesandomittingmaterialsdonotdiffermuchfromthoseobtainedwithvalueadded.Thewithin-

firmest ima tes withs a l e s lnsteado f valuea d d e d are alsos i m i l a r whenc o n s t a n

t returnst o scale is imposed.H o w e v e r , i f constant r e t u r n s t o scale isnoti m p o s

e d l a r g e d i s c r e p a n c i e s betweent h e t o t a l a n d w i t h i n

-f i r m e s t i m a t e s o c c u r T h e w i t h i n - -f i r m estimatesa r e

muchimprovedwhenmaterialsaretakenintoconsideration.Hence,theomissionofmaterialsinthesalesspecificationaffectsespeciallythewithin-finnsestimates

2.4.3 R&DandProductivityG ro wthinJapanesemanufacturingfirms

KwonandInui(2003)conductedaresearchtoexaminetherelationshipbetweentheR

&Da n d t h e p r o d u c t i v i t y i m p r o v e m e n t i n J a p a n e s e m a n u f a c t u r i n g firms.I n t h i s research,theyestimatedaCobb-

OninvestigatingthecontributionoftheR&Dtotheproductivityg r o w t h ofJapanesemanufacturingf i r m s , Kwona n d Inui(2003)usedtwoapproaches:ProductionFunctionA p p r o a c h a n d T h e R a t e o f Returnt o R & D A p p r o a c h I n t h e productionfunctionf r a m e w o r k , t h e disadvantagei s thatpossibleb i a s i s allowedd u e tosimultaneousoutputandinputdecisions,andtheadvantageisthattheassumptionsofcompetitivefactorm a r k e t s , costm i n i m i z a t i o n , andc o n s t a n t returns

tos c a l e a r e avoided.Inthisapproach,therelationshipbetweenR&Dandproductivityg r o w t h isrepresentedintheregressionfunctionusingfirst-differencesasfc›llows:

log(K)„

—

Where:Y d e n o t e s thevaluea d d e d , K a s thephysicalc a p i t a l s t o c k , La s thel a

b o r input,andRastheknowledgec a p i t a l sto ck

4/isthetime-specificvariable a n d therateofdisembodiedtechnicalchange.Thesubscripts/andtden‹itethefirmandtheyearrespectively.Here,1-

R&Dcapitalstock.Therelationbetweenthegrowthoflaborproductivitya n d thelevelofR&Dintensitycanbewrittenasthefollowingequation:

log(K)„whereEistheR&Dexpendituresoffirmiinperiodt

Inbothapproaches,thestudyfoundap o s i t i v e andsignificanteffectofR&Dexpenditureonproductivitygrowth

andthiseffectisdifferentbythefirms’sizesandcharacteristicsoftechnology.The

R&Delasticitiesarehigherforthelargesizedandhigh-tech

firmst h a n t h e y a r e f o r o t h e r t y p e s o f f i r m s B e s i d e s R & D c a p i t a l , t h ephysicalcapitalstockalsosignificantlyaffectslaborproductivitygrowth.Moreover,anindustryeffectisfoundnotimportantinexplainingproductivitydifferencesamongfirms

2.4.4 TheeffectofR&DCapitalonDanishFirmProductivity

Unlikethetwoabovestudiesusingtimeseriesdataonanalysis.,thispapera n a l ys

es theimportanceo f R&Df o r Danishprivatef i r m productivityo n thebasiso f cross-