What makes a firm successful? The answer to this question is multifaceted, but one explanation focuses on the relationship among innovation, productivity, and exporting. It has been observed that there is a positive relationship between productivity and exporting, but does this mean that exporting increases firm productivity? In "Innovation and the Export-Productivity Link," IESE Professor Bruno Cassiman and Professor Elena Golovko of Tilburg University explore this relationship and show that "firm innovation status is critical in explaining the positive export-productivity association documented in prior research." For their study, they gathered data from Spanish manufacturing firms over the time period of 1990-1998, ultimately gleaning data from thousands of firms from twenty different industries, forming a sample that "is representative of the Spanish manufacturing sector." What they found suggests that innovation should be a primary focus among firms hoping to survive and thrive - as well as policy makers whose communities also benefit from a business's success.
Two basic questions are important building blocks of this study. First, what leads firms to begin exporting in the first place? And how has the positive relationship between productivity and exporting been viewed by previous research? Studies have suggested that firms self-select when it comes to exporting?that is, only firms with enough financial resources to enter the export market will do so. This is called the "sunk cost hypothesis." The decisions firms make early on in their existence are, therefore, very important, since they will affect a firm's financial standing - and these decisions are often determined by innovation. If a firm can innovate, it will increase its productivity; and if it's productive, it has a better chance of being in a position to enter the export market. The simple truth is that innovative firms are more likely to enter the export market than non-innovative firms. Another possibility for why firms begin exporting is the "learning-by-exporting" theory, in which "exporters may learn from their foreign contacts, adopting new production strategies and increasing productivity." In general, the "sunk cost hypothesis" is more widely supported.
Firms can increase their productivity in several ways, but the most important way seems to be through R&D and other innovation strategies. Many studies, including those that focus on Chinese, Spanish, and other European companies, have shown "the positive and significant effect of R&D and innovation on firm productivity and productivity growth." Not only do R&D and innovation increase productivity - they also help explain a "firm's decision to export and export volumes." Indeed, the importance of innovation cannot be underestimated when it comes to explaining the relationship between productivity and export. Studies focusing on firms in China, Spain, Taiwan, and Italy all support this idea. In general, what all of this previous research suggests is that "innovation activity may be responsible for both the productivity enhancement and export orientation of a firm and explain the correlation between exports and productivity." In other words, innovation is the key to unlocking this relationship.
The exact relationship among innovation, productivity, and export can be analyzed by evaluating the total factor productivity (TFP) of various types of firms. In this study, "productivity distributions" were analyzed for three groups of firms: exporting and non-exporting firms; innovating and non-innovating firms; and exporters and non-exporters for innovating and non-innovating firms. The size of a firm (large, with more than 200 employees; or small, with 200 employees or fewer) played a role in how TFP was evaluated.
An analysis of the first of the groups listed above confirmed that there is a "positive association between export orientation and firm productivity." For the second group, the analysis showed that "innovation-active firms show higher productivity levels than non-innovating ones." Unlike other studies, this analysis suggests that product innovation (brand-new products, or new features, design, or functions of existing products) affects productivity much more than process innovation (changes in the production process, such as new machines or production organization). Finally, an analysis of the third group showed that "innovating exporters do not differ significantly in their productivity levels from innovating non-exporters." However, there is "a significant difference in TFP levels for exporters and non-exporters" among non-innovating firms.
What does all of this mean for firms? Perhaps most importantly, it means that innovation is key in determining the link between productivity and export. One of the study's most significant findings in this regard is that if innovation is considered, "firm productivity comes out to be independent of whether or not a firm participates in exports." As with most business theories, this is not true for all firms all of the time, and exceptions do exist. But there's no getting around the fact that innovation is a key element in increasing a firm's productivity - and public policy would do well to encourage innovation, especially product innovation. Policy often focuses on providing incentives to firms who export; but policy makers should be aware that innovation is a kind of "secret ingredient" that can enhance any plan to increase productivity. Business isn't always neat and tidy, with clear causes and effects; but firms and policy makers alike should be sure to give innovation the attention it deserves.