Innovation and Productivity: a Firm Level Study of Ukrainian Manufacturing Sector

There is a large literature on innovation contribution to productivity for EU countries including CEE states. At the same time very little is known about CIS countries. We apply the same framework and select the same period (2004-2006) to make our study comparable. The modified CDM model considers not only companies that report formal innovation expenditures but the entire sample of manufacturing firms. This approach accounts for underreporting of innovative firm’s efforts, especially among small firms. Additionally, we allow dynamic two-direction relationship between productivity and innovation input and test “success breeds success” hypothesis. Our major attention is given to the impact of the government support on firm’s R&D expenditures, innovations and productivity. The results show that government financial support has positive effect on the probability and amount of firm’s innovation expenditures but not on the probability of innovation itself, neither for process nor for product innovation. The latter finding emphasizes that only the effective government innovation policy may actual positively contribute to the productivity after all. We found that both parts of the "success breeds success" hypothesis work. Firms which have introduced new or significantly improved product in the past are more likely to invest into R&D and to come up with a product innovator in the future. Our results also suggest that amount of innovation expenditures in the following period is influenced by firm’s productivity in the previous period. Empirical evidence of this is quite rare in the literature. Finally, similar to Estonia during late transition only process innovation has been found to contribute to productivity of Ukrainian firms.