Defining and Measuring the Innovativeness of Firms (ESCoE DP 2019-19)

In this paper an encompassing, output orientated, indicator of the innovativeness of firms which defines innovation as the successful exploitation of new ideas, is formalised as the contribution of innovative activity to firm profit growth and measured as the difference between growth in the (endogenously determined) nominal profits of the firm and an appropriately weighted sum of exogenously determined (i) growth in wage rates and (ii) inflation/demand shifts in the market for the firm’s output. The measure can be calculated for any firm using publicly available accounting data. For an unbalanced sample of 16,457 quoted firms over the period 1988-2012, operating in 39 sectors, and in 38 countries, the mean value of the innovativeness measure over the whole panel data set is estimated as 5.15% p.a. Statistically significant differences in innovative performance within and across countries, sectors and time are identified.