Working Paper No. 90. Almas Heshmati, Yee-Kyoung Kim and Hyesung Kim (2006) The Effects of Innovation on Performance of Korean Firms.

Abstract: This study empirically examines the relationship between knowledge capital and performance heterogeneity at the firm level. The model is based on a knowledge production function comprising of four interdependent equations linking innovativeness to innovation input, innovation output and productivity. The empirical part is based on Korean firm level innovation data. The model is estimated using advanced econometric methods. We investigate whether innovation is a significant and contributing determinant of performance heterogeneity among firms. In examining the relationship between innovation and productivity we correct for selectivity and simultaneity biases. The results show that there is a two-way causal relationship between knowledge capital and labor productivity. Firm-specific effects positively contribute to innovation output but they are negatively related to productivity. Industry heterogeneity does not affect innovation output or productivity.