Impact of innovation on firms performance, employment and technology spillovers: Evidence from Indian manufacturing firms

Abstract

Using a comprehensive dataset of Indian manufacturing firms, this thesis investigates the impact of innovation, measured using granted patents, on firm-level productivity, employment and technology spillovers. The first objective of the thesis empirically examines the two-way relationship between innovation and firms’ productivity. Results obtained from negative binomial and quantile regression estimates confirm the existence of a complementary relationship between innovation and firms’ productivity. Further results from the propensity score matching method confirm that innovative Indian manufacturing firms are significantly more productive than their non-innovative counterparts. The empirical findings also show robust evidence that the impact of productivity on Indian manufacturing firms is way greater than the impact of innovation on productivity. Based on this, we suggest that policies aimed at promoting innovation should focus on productivity-enhancing measures. The second objective of the thesis investigates the impact of process and product innovation on employment. Econometric findings obtained using the generalised method of moments (GMM) confirm that process and product innovation significantly displace labour in Indian manufacturing firms. However, this labour-displacing impact of process and product innovation is limited only to domestic firms, and process and product innovation in foreign firms do not significantly influence the innovation output of Indian manufacturing firms. Based on this, we encourage foreign equity participation in Indian manufacturing firms. The third objective of the thesis investigates the impact of horizontal and vertical FDI (Foreign Direct Investment) spillovers on the innovation output of Indian manufacturing firms, with a special focus on the firms agglomerated in the major industrial clusters of India. Findings from negative binomial and GMM regression confirm that horizontal and vertical FDI spillovers do not significantly influence the innovation output of Indian manufacturing firms. This chapter identifies a lack of absorptive capacity as the key factor behind the inability of firms to leverage the benefits of FDI. Therefore, we suggest capacity building in firms through research and development expenditures. However, the results also show that firms located in the major industrial clusters of the country that capitalise on horizontal spillovers significantly innovate more. This highlights the crucial role of industrial clusters in generating innovation spillovers, reflecting the need for differentiated policies for firms in the industrially agglomerated clusters to nurture the benefits of industrial clustering. Further results from the difference-in-difference method confirm that foreign firms have been significantly innovating more in India after the 2014 FDI policy liberalisation. Based on this, we suggest encouraging FDI in Indian manufacturing firms to promote innovation.